The Telegraph
Since 1st March, 1999
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Fringe tax drives companies loony

March 1: The corporate world today wailed over the fringe benefit tax introduced in the budget yesterday.

But finance minister P. Chidambaram promised to take a fresh look at only one element of what is being seen as a Draconian levy: expenditure on sales promotion and publicity.

'I don't know why the draftsman (of the finance bill) put it in there. I will need to take another look,' Chidambaram said while appearing to concede that sales promotion spends had nothing to do with perquisites for employees and was, therefore, irrational to tax as a fringe benefit.

The fringe benefit tax has been imposed to capture revenue from notional perquisites that companies dole out to their employees as a group.

Since it is difficult to attribute the perk to an individual employee, Chidambaram has proposed to club all the expenditure on items ranging from entertainment to club facilities and guest houses to telephone use and extract a 30 per cent tax on the value from the companies.

The tax has sent shockwaves through industry: it assumes that the spending on guest houses, conferences, employee welfare and club membership are perks and that 50 per cent of the expenses under these heads indirectly accrue to employees and should be taxed.

In the case of telephone expenses, it assumes that 10 per cent of all calls made from an office is made by an employee for personal reasons and therefore taxable as a fringe benefit. In fuel consumption, it assumes that personal use by the employee amounts to 20 per cent and is, therefore, taxable.

'The whole problem with this tax is that it leaves too much power in the hands of the income-tax officer to decide which is a fringe benefit and which is not... it will mean too much paperwork as separate returns will have to be filed on these supposed fringes.

'It will also mean firms will cut down on normal employee welfare and the tax burden eventually passed on to employees,' said Sudatto Sen, a chartered accountant.

Companies are scrambling to find alternatives to deal with the tax since Chidambaram is determined not to withdraw it.

One way out would be to restructure the salaries of employees and get them to bear the burden of the tax. Companies are weighing the possibility of stopping reimbursement of expenses and adding the entire benefit on to the salary.

'The finance minister is really trying to capture the cost to the company,' said Saumil Shah, a senior manager of the international tax group of Grant Thornton.

But in his effort to plug loopholes, Chidambaram has angered companies by trying to tax genuine business expenditure.

The finance minister said genuine expenses would still be treated as business expenditure and would not be taxed, but did not seem to indicate how the distinction might be made.

While Chidambaram appeared to have no confusion about what constituted business expenditure and what was a fringe benefit given to employees, there was no indication that the taxman would share the same view.

'It's all-inclusive and has an exhaustive reach,' rued a senior official affiliated to a multinational.

Dilip Piramal, chairman of VIP Industries, said Chidambaram had already promised to take another look. Piramal, however, thinks differently from his peers who have simply condemned the tax.

'We cannot have corporate taxes lowered and demand exemptions. It is unfair. We cannot have it both ways,' he said.


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