I once worked in an institute that followed government rules meticulously. Among other things, one-third of whatever payment you got by working, or writing for, other organisations had to be surrendered to the institute.
This is part of normal consultancy rules and was unobjectionable. The government component came in through interpretation of the rules. Which were arbitrary and non-transparent.
They were interpreted in your favour if you got along well with the head of the organisation.
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What is fringe benefit tax?
And were interpreted perversely if you fought with the head. Since I erred towards the latter rather than the former, I confronted situations that were bizarre.
On one occasion, I was invited to speak at a seminar organised by a chamber. And only got a free lunch, no payment. Confronted with a letter demanding an explanation as to why I had not surrendered the requisite one-third, I offered dessert to the institute.
On another occasion, I received no money, but a free brief-case. I offered one-third of the brief-case. Since that was difficult to implement, the value of the brief-case was monetised and I surrendered one-third of the money value.
I have been reminded of these instances because of the fringe benefits tax.
The furore over FBT and banking cash transaction tax will eventually die down and the Finance Bill will be passed. The latter will only apply to current accounts and the threshold will increase to 100,000.
The former will exclude sales promotion, tour and travel and will have an across-the-board rate of 10 per cent instead of the present variation in rates across types of fringe benefits. We will feel immensely relieved.
But the conceptual problems will remain, even if we choose to ignore them. Budget 2005-06 will be remembered for one inequality and one equation.
The inequality is the oft-repeated outlays don't equal outcomes. How we operationalise the difference is anyone's guess. And the new equality is, outlays equal incomes.
There are two conceptual problems that are legal. First, how can expenditure be equated with income and labeled an income tax? Second, how can tax that should be paid by an employee devolve on the employer?
Employers for FBT purposes really mean the organised sector. Twenty-seven million people are employed in the organised sector. While 18.6 million work for the public sector, 8.4 million work for the private sector.
Surely, a cost-to-company argument shouldn't be applied only to the private organised sector, thereby creating an artificial incentive towards working for the government.
The Fifth Central Pay Commission did have a cost-to-company argument for the government, although it was not elaborated on. To quote, "A pay scale should normally give a total picture of the emoluments of a post, rather than being fragmented into a number of allowances."
However, other reports, like the Expenditure Reforms Commission, did advance the cost-to-company cause. Not implemented, of course.
And do remember who the finance minister was when the Fifth Central Pay Commission's recommendations were partially implemented.
Incidentally, if we now accept an across-the-board FBT rate of 10 per cent, we may retreat from the cost-to-company cause, because we will create an incentive for employees who are in higher income tax brackets to disguise part of their emoluments as FBT.
To get back to the economist's conceptual problem with FBT, a quote from the Budget speech is necessary. "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."
That's the crux of the problem. If it is an individual private payment and is attributable, it should be taxed as perquisites. Some of the examples given, like free air tickets or scholarships to children, are of this nature.
There is certainly misuse and we need to tighten up perquisite taxation. But through FBT, we aren't doing only that. We also want to tax collective expenditure, not directly attributable to individuals and all hell breaks loose.
If we accept the principle, and we shouldn't, why only include items listed in the Finance Bill? The lift in my office is a fringe benefit. It saves me the trouble of taking the stairs. Why not tax some of the office expenditure on the lift? On the other hand, lack of a lift is also a fringe benefit.
It is good for my health. Why not tax a certain percentage of non-expenditure on the lift? I do use the office computer for personal e-mails. Why not tax a certain percentage of expenditure on office computers? These aren't frivolous examples, because they illustrate the arbitrariness involved.
There are countries that tax fringe benefits, although those that tax perks, don't have counterparts of FBT. But wherever there is FBT, there are countless examples of bizarre situations. Citing other countries is not a convincing argument.
We are in an era where we argue that most public goods are actually collective private goods. Since the government doesn't have resources and because government delivery is inefficient, wherever possible, hand over physical and social sector provisioning to the private sector. And then come along and tax that collective expenditure under FBT.