No benefits on the fringe

The Fringe Benefit Tax (FBT) is casting a shadow beyond its grave. When it was introduced in 2005, the tax was cloaked in uncertainty over the valuation of perquisites enjoyed by company executives.

The Fringe Benefit Tax (FBT) is casting a shadow beyond its grave. When it was introduced in 2005, the tax was cloaked in uncertainty over the valuation of perquisites enjoyed by company executives. This continued for a while till the taxman figured out the value of benefits like sweat equity. With the government reverting to rules on taxing perks — ranging from company-provided houses, cars and stock options, to household help and holidays — that existed before the FBT, some confusion lingers.

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This has more to do with the timing of the notification of the rules, a good five months after the FBT was scrapped, than with rates or the method of assessing the value of a perk. Two departures ensue from the restoration of the status quo ante: the employee, and not the employer, pays the tax now; and the value of a perk is specific, no longer notional.

The delay in notifying the rules will create some bunching of taxes in the last quarter for a very small section of Indian employees that enjoy corporate largesse beyond their wages. Widespread hardship there will be not if the top earners in a company are asked to pay in a quarter taxes on perks they enjoyed for a full year. Although no specific figures are collated, for an idea of how many Indians enjoy such esoteric benefits as corporate club memberships consider this. Rs 122,600 crore was collected as income tax last year, while the FBT yielded a mere Rs 6,000-odd crore. The move away from the notional value of a perk ought to whittle these slim pickings further because the taxman has chosen to largely stay on with rates that obtained prior to 2005. A few residual doubts like the treatment of meal cards will hopefully be cleared up soon.

Legitimate business expenditure needs exemption from tax but the short life of the FBT is a telling example of a battle against income masquerading as perquisites. The solution does not lie in shifting the incidence of tax between the employer and the employee but in arresting the trend. A simplified tax system that has reasonable rates and fewer exemptions can help avoid experiments like the FBT. We desperately need a rules-based system to remove discretionary taxation that is not only inefficient but also impossible to administer. A new tax code being drafted holds out the promise of equity, transparency and stability. Tax systems in much of the world have undergone extensive evolution to reach a steady state condition where rates change rarely, if at all. India stands to gain little by trying to reinvent the wheel.