The fringe benefit tax is proposed to be a self-contained law. Chapter XII-H, with Sections from 115W to 115WL, contain the definition section, the charging section, the procedure for filing of return, assessment, and payment of tax, interest etc.

In effect, this is the creation of a whole new law, for taxing expenditure. The ostensible purpose of the law is to "adopt a two pronged approach to the taxation of fringe benefits under the Income-Tax Act.

Perquisites, which can be directly attributable to the employees will continue to b taxed in their hands in accordance with the existing provisions of section 17(2) of the Income-Tax Act and subject to the method of valuation outlined in Rule 3 of the Income-Tax Rules.

In cases where attribution of the personal benefit poses problem or for some reasons it is not feasible to tax the benefits in the hands of the employee, it is proposed to levy a separate tax known as the fringe benefit tax on the employer on the value of such benefits provided or deemed to have been given to the employees (Memorandum to the Bill).

While the intention may be honest, the law is drafted otherwise. It is, in effect, a tax on expenditure, which covers virtually all types of expenditure. If the law is passed as it is drafted now, it would result in taxing the expenditure in addition to the present system of taxing the income.

Entry 82 of the Union List, read with Article 246(1) of the Constitution empowers Parliament to levy tax on income other than agricultural income. The provisions of this Entry will have to be construed to liberally to cover within its ambit a tax on expenditure.

Old wine in new bottle:

In the past, certain expenses were disallowed under the Income Tax Act. A limit was also placed on certain expenditure like advertisement, travels etc. The disallowance was justified on the ground that our economy had resource constraints and extravagant expenditure was to be discouraged.

It was P Chidambaram who in the past rationalised the law by repealing many such provisions, recognising the fact that in a buoyant economy such a cap on expenditure was out of tune with a modern tax structure.

Now the same Finance Minister wishes to bring in the same tax on expenditure, and justifies it on the ground that the tax exists successfully in countries like Australia. While the tax does exist in Australia, what the Australian tax law does is to tax fringe benefits in very narrow sense of the term, and does not cover every possible head of expenditure in its fold.

Discourages employers to spend for the purpose of employee welfare:

Any contribution by the employer to an approved superannuation fund shall be taxable. Provisions like this are likely to discourage employers from spending for the welfare of employees.

In a country where social security measures are conspicuous by their absence, where State does not have resources to provide for the social welfare of its large population, and where the employers generally do not have a good track record of making provision for the welfare, provisions such as these act as disincentives from spending for social welfare of the staff.

No threshold limit, covers all and sundry:

The proposed law has not specified any threshold limit, and it covers all employers irrespective of the number of employees. Since it is a deeming provision, even in a situation where there are no employees, if the amount is spent on the specified heads, the tax would be attracted.

Small shops, and petty businesses would also be covered. If the law is to serve any meaningful purpose, the Finance Minister should specify a threshold limit in terms of number of employees and/or the turnover.

Will discourage international investment:

Additional tax burden of 33.66% on what has been described as fringe benefits to its employees would discourage the multinationals from investing in India. We are at a stage where we are trying to compete with China for every dollar of foreign investment. Laws such as these are bound to throw wrong signals, dissuading international companies, who look for a stable and transparent tax structure, from investing in India.

Fringe Benefit Tax: Not a Fringe Matter
An analysis of the fringe benefit tax