The Telegraph
Since 1st March, 1999
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It's a divided house on the fringe

New Delhi, May 3: India Inc is divided on the fringe benefit tax: some firms intend to shoulder the burden while others are mulling the option of passing on at least a part of it that can be directly attributed to their employees.

'We are looking at the fine print. In the next few days, we will decide whether or not to pass on a part of the burden to our employees,' said Swati Piramal, director at Nicholas Piramal India Ltd. 'It seems that FBT will increase our tax liability quite a bit. However, the picture will be clear in two to three days.'

'The entire concept of FBT can be termed as khatta-meetha. The government has recognised the importance of IT and pharmaceuticals as knowledge economies but the paperwork to calculate FBT will kill us. It will be a nightmare. There is also a great possibility of corruption.'

Not everyone is quite as forthright: Adi Godrej, chairman of the Godrej group of industries, said he intended to shoulder the burden and hoped to recover some of it by marking up some product prices.

'The FBT is very inflationary for the economy. There will be no other option but to raise prices because the tax will increase expenditure,' said Godrej.

Others like Onkar Kanwar of Apollo Tyres said they did not wish to alienate employees by loading them with a tax burden that many of them would resent. 'Employees are an asset to the organisation. We don't want their performance to get affected. Hence, we will absorb the entire impact of FBT. The attempt will be to try and save costs somewhere else.'

'On a broad parameter, the tax liability of Apollo Tyres will be 1.5 per cent of our revenues,' Kanwar said.

A number of companies are in the midst of the annual process of reworking the compensation package of their employees and had been waiting to hear the fate of FBT.

The phone lines have been buzzing with companies contacting consultants like KPMG to help them rejig salary structures in the light of the new tax.

Says Rahul Garg, executive director of PricewaterhouseCoopers: 'Companies will definitely pass on some of the burden on account of FBT to employees where they are directly attributable. These could be in the case of items of expenditure like car perquisites and mobile telephone bills.'

But there are a lot of grey areas in relation to the fringe benefit tax itself: for instance, it does not apply to guest-house expenditure when these are used solely for training purposes. Virtually, no company will be able to claim this benefit since no one maintains a guesthouse solely for this purpose.'

Some experts reckon that the fringe benefit tax itself could be open to legal challenge. Most of these are legitimate business expenditure and, therefore, ought not to be taxed. But the bigger beef is over the fact that it is somewhat unfair in its application.

The IT, pharmaceutical and construction companies will have to pay FBT on just 5 per cent of their expenditure on conveyance, tour and travel while others in the manufacturing and service industries and other people-related businesses will have to fork out the tax on 20 per cent of the spending.

'Even within the IT sector, it will apply only to the manufacture of software; the benefit isn't being extended to business process outsourcing and call centres,' says Garg.

One interesting view posited by some experts like Nikhil Bhatia, partner (tax) at BSR & Co, is that it will work to the employee's advantage if he shares or pays the FBT on mobile phones and car maintenance instead of claiming a perquisite allowance in salary (which would then be taxed at the marginal rate of taxation, say 30 per cent).

But it is still unclear whether the taxman would allow it since the fringe benefit tax is supposed to be paid by companies.

Some tax experts like Nihal Kothari, adviser to Hindustan Lever, said it would have been more prudent for the finance minister to raise corporate tax by a per cent or two.

After extreme lobbying by the chambers, this year's budget brought down the corporate tax rate to 30 per cent from 35 per cent. 'A rise in transaction costs through FBT will increase both the cost of collection and compliance. The process will lead to a complicated system bedevilled by litigation,' he added.

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