"I have looked into the present system of taxing perquisites and I have found that many perquisites are disguised as fringe benefits, and escape tax. Neither the employer nor the employee pays any tax on these benefits, which are certainly of considerable material value.
"At present, where the benefits are fully attributable to the employee they are taxed in the hands of the employee; that position will continue."
"In addition, I now propose that where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees, they shall be taxed in the hands of the employer."
"However, transport services for workers and staff and canteen services in an office or factory will be outside the tax net. The tax is not a new tax, although I am obliged to call it by a new name, namely, fringe benefits tax. The rate will be 30% on an appropriately defined base. . ."
This was part of the budget speech made by the Finance Minister, P Chidambaram, on February 28, 2005.
India Inc was far from impressed.
Indeed, it has caused considerable consternation amongst industrialists and corporates, who have been very disappointed with this particular move in Budget 2005-06. Here is a reaction from Adi Godrej, the man heading the Godrej group.
"In my view, there are two key negatives from this budget. One, the fringe benefit tax. I think it is quite absurd to tax things like travel. Now, when our salesmen travel, they are thinking that it is a 'fringe' benefit. If you talk to the salesmen, they hate to travel. They only travel because that is their job. They are away from their family for days together.
To call it a fringe benefit is absurd. Certain things I can understand when categorized as 'fringe' benefits. But not things like travel. So, some of the provisions in the fringe benefit tax would have to be amended. To my mind, it is a badly formulated tax, disallowing or taxing legitimate business expenses."
Thus, it becomes obvious that taxing such legitimate business expenditure is a totally retrograde step. We did a brief research on the impact of the FBT on some of India's top corporates for the period ending December 2005 (9mFY06).
The impact can be seen from the table below. While the average impact for the companies taken is not that much, at just around 0.13% of sales for the period, and 0.80% of the corresponding PBT, the main point to be noted here is the direction of this move.
It is undoubtedly a step backwards and only adds to the hassles of corporates, which are anyways burdened with a multitude of taxes in the form of sales tax, octroi, entry tax, excise and the like.
| Company Name | FBT (Rs m) | Sales (Rs m) | PBT (Rs m) | % of sales | % of PBT |
| A.C.C. | 63 | 33,444 | 5,947 | 0.19% | 1.06% |
| ABB | 52 | 23,553 | 2,961 | 0.22% | 1.76% |
| BHARTI TELE | 128 | 82,684 | 17,504 | 0.15% | 0.73% |
| CIPLA | 32 | 21,151 | 5,043 | 0.15% | 0.63% |
| DABUR | 28 | 14,196 | 1,795 | 0.20% | 1.57% |
| DR.REDDY | 51 | 16,581 | 2,341 | 0.31% | 2.20% |
| HDFC | 19 | 30,298 | 10,428 | 0.06% | 0.18% |
| HINDALCO | 71 | 77,423 | 13,083 | 0.09% | 0.54% |
| HPCL | 83 | 502,020 | (16,173) | 0.02% | -0.52% |
| ICICI BANK | 173 | 97,947 | 22,126 | 0.18% | 0.78% |
| INFOSYS | 90 | 68,976 | 20,191 | 0.13% | 0.45% |
| IPCL | 32 | 61,710 | 10,560 | 0.05% | 0.30% |
| ITC | 147 | 70,061 | 24,424 | 0.21% | 0.60% |
| L&T | 163 | 101,403 | 7,414 | 0.16% | 2.19% |
| MARUTI | 48 | 87,812 | 12,246 | 0.05% | 0.39% |
| REL. ENERGY | 36 | 29,810 | 5,420 | 0.12% | 0.66% |
| RELIANCE | 200 | 566,690 | 77,780 | 0.04% | 0.26% |
| SAIL | 206 | 187,509 | 48,525 | 0.11% | 0.42% |
| SATYAM | 67 | 34,790 | 10,277 | 0.19% | 0.65% |
| SBI | 1,310 | 342,430 | 62,239 | 0.38% | 2.11% |
| SHIP. CORP. | 23 | 24,804 | 7,348 | 0.09% | 0.31% |
| TATA POWER | 56 | 33,377 | 6,002 | 0.17% | 0.93% |
| TATA STEEL | 153 | 146,931 | 42,909 | 0.10% | 0.36% |
| TATA TEA | 15 | 12,741 | 2,158 | 0.12% | 0.70% |
| TCS LTD. | 137 | 89,301 | 24,660 | 0.15% | 0.56% |
| VSNL | 32 | 28,219 | 5,567 | 0.11% | 0.57% |
| WIPRO | 179 | 69,945 | 16,164 | 0.26% | 1.10% |
| Total | 3,593 | 2,855,806 | 448,939 | 0.13% | 0.80% |
One of the factors that determines the competitiveness of a country's industries is the tax regime in that country. Indian corporates, as mentioned above, suffer from a maze of taxes, plus the FBT.
To add to that, there are numerous surcharges as well, such as the education cess. Therefore, it does seem that the levying of the FBT could be a smaller part of a much larger problem -- that of the maze of taxes that plagues India Inc. and erodes its competitiveness.
We hope that the finance minister, in this budget, will take steps that show his forward-looking approach, with the longer-term competitiveness of India Inc in mind.
India has proved itself in fields such as software, where the tax regime is very favourable and the policy environment is friendly. This is a wonderful example that can be repeated in many other industries, provided the right amount of political will is there and red-tapism is dispensed with. Undoubtedly, the industry would be looking forward to less of such 'fringe' taxes, come February 28, 2006.
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