Why FM wonÕt remove India IncÕs FBT headache

 

12 January 2006

- Ila Patnaik



Indian industry can hope for some rationalisation in the FBT (Fringe
Benefit Tax) in Budget 2006-07 addressing genuine business
expenses. However, despite all its unpopularity, the FBT is unlikely
to be completely abolished. The reason does not lie in the tax
collections from FBT, but the phenomenal rise in personal income tax
that has come after the imposition of the FBT. The collections, at Rs
66,000 crore are 20 percent higher than last years's Rs 50,000
crore. This increase has partly occured because companies have changed
the structure of their pay packets so that a higher share of salaries
being paid is taxable income. Companies now have to pay taxes on the
fringe benefits they give to employees. This makes paying part of the
CTC (Cost-to-company) as perks costly for the company. To shift the
burden of paying taxes to the employee, companies have reduced perks
and increased the amount of taxable income. The Finance Ministry feels
vindicated in its claim that companies were giving employees perks
that were escaping the tax man and the FBT has made them ammend their
ways. It is, thus, unlikely, that Mr Chidambaram is going to give up
the FBT stick.

The FBT, which taxes genuine business expenses along with the perks,
is unfair to companies especially whose genuine business expenses
entails a large component of travel or entertainment expense. The tax
is a presumptive, rather than discretionary tax and does not involve
administrative costs in the form of tax officials visiting
sites. Unless industry can offer a better non-discretionary tax which
achieves what the FBT has achieved, it may be better off focusing its
attention on asking for changes in the FBT for their specific
industry, rather than a blanket removal of the tax, as that appears to
be an realistic option for Budget 2006.

But can the entire 20 percent increase in personal income tax revenues
be attributed to a shift in incomes towards taxable salaries? Last
year also saw rationalisation of personal tax structure, a reduction
in tax rates and the rollout of the Tax Information Network
(TIN). Lower tax rates, and slab changes, reduced the tax revenue
collected from the existing tax base. But, as predicted by the Laffer
curve, lower rates also encourage higher compliance. These changes
probably encouraged people to comply, since the benefits from evasion
came down and the risk of getting caught went up. The FBT cannot,
therefore, be given sole credit for the higher income tax
collections. One way or another, the recipe works and Chidambaram is
unlikely to abandon it.


STT

The STT (Securities Transaction Tax) on buying and selling in the
equity market will hopefully not be increased under pressure from the
Left, but it is unlikely that the tax will go. On equity market
transactions between March 1 and 30 November 2005, the Finance
Minister has already collected Rs 1700 crore as STT. The STT from
March to May 2005 was 0.15 percent. Since June it has been 0.20
percent, paid half by the buyer and half by the seller. The large
trading volumes in the stock markets this year are responsible for the
high revenue. Hopefully, this tax will not go the way of other
transaction taxes, like custom duties, which slowly inch their way up,
because of their ease of collection their ease of collection.