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Fringe tax tweak under study

New Delhi, Jan. 2: The finance ministry is considering ways to relax the manner in which the much reviled fringe benefit tax (FBT) is calculated.

The proposals under study include tax relaxation on certain expenses which corporate houses define as pure business expenditure. There is also a proposal to set a floor on the number of employees or turnover for a company to come under FBT. At present, there is no such threshold.

North Block has been receiving feelers from different quarters, seeking relaxation in the way the government taxes expenses like travel, superannuation, sales promotion and conferences.

The finance ministry is also considering a suggestion to set a threshold for a company (in terms of number of employees or turnover) to come under FBT. This will automatically let small businesses off the hook.

Whether the government finally accepts these proposals will depend on its perception of the electoral response to such sops as well as revenue compulsions.

In last year’s budget, the government had marginally relaxed FBT. Contribution of up to Rs 1 lakh per employee made by an employer to an approved superannuation fund was exempted from FBT. Amounts in excess of Rs 1 lakh were to come under such tax.

Similarly FBT, which is a presumptive tax and is imposed on a percentage of the planned expenditure on a head, was diluted for sales promotion expenses. Under the diluted dispensation, only 20 per cent of the expenditure under this head was considered for taxation. In case of tours and travel, only 5 per cent as opposed to an earlier 20 per cent of expenses was to be considered for calculating FBT.

Fringe benefit tax has been one of the fastest growing taxes despite widespread opposition to it.

Data with the income tax authorities show that the government collected Rs 2,441 crore from FBT in the April-November period last year compared with Rs 1,756 crore in April-November 2005, an increase of 39 per cent.

It’s for sure that any relaxation on FBT will be appreciated by a middle-class urban electorate as well as by corporate houses.

A chamber of commerce has demanded the replacement of FBT by a 1 per cent surcharge on corporate tax. Officials, however, say this is unlikely to be accepted.

In the 2005 Union budget, the government came out with the controversial 30 per cent tax on “fringe benefits” given by firms to its employees.

However, howls of protest from corporate houses as well as salaried taxpayers forced the finance ministry to issue a series of notifications marginally diluting the tax, though it maintains that the tax is a necessity.

FBT was conceived by the ministry to put a leash on corporate houses that were trying to pass on rewards to employees through non-taxable perks.

However, critics point out that in the process, the government is taxing legitimate corporate expenses such as entertainment and travel.

Revenue officials argue that the “golden rule is anything which is not covered by the normal income tax but which is a benefit should be covered by the FBT”.

Analysts, however, feel the logic used to keep some expenses out while taxing others is skating on thin ice and can be challenged.

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