Presumptive Tax

The law does not distinguish between the amounts of fringe benefits spent on the employees, and the expenditure incurred on non-employees, presumably because the lawmakers thought that if they decided to so segregate the expenditure, though such segregation would be logical, the taxpayers would have a tendency of shifting the expenditure to those heads where FBT is not applicable. This would make the new tax prone to litigations, arising out of the tax payers and the tax gathers trying to interpret the various heads of expenditure in their own way.

The law thus covers all possible expenditure where the lawmakers would have presumed that the taxpayer would be hiding his fringe benefits, which has resulted in certain absurd categories of expenditure also being taxed as fringe benefits.

So far so good. But so far as the provisions do not distinguish between amounts, which are genuine fringe benefits to the employees, and the amounts, which are expenditure not pertaining to the employees, they seem illogical.

Simultaneously with taxing the income under the Income Tax Act, this new provision taxes expenditure also, resulting in double taxation. While the model may have been borrowed from countries like Australia and New Zealand, when it comes to taxability of non-employee related expenditure, the Indian law differs considerably from the laws in those countries where the latter has been carefully left out.

The argument of the Finance Minister that this tax would not harm much as it would increase the effective rate of taxation by a mere 1 to 1.5 % in respect of the most companies, is also based on a very faulty logic.

It the intention of the tax is to increase the effective rate by a small amount, it would have been appreciated more if he had straightaway increased the rate, without resorting to such complex litigation-prone mechanism.

A Presumptive Tax, which interferes with other Presumptive Taxes

Section 44AD, AE, and AF provides for presumptive taxation of certain assessees, viz., civil contractors, transporters, and retail traders. In the cases of these three categories of assessees, income is presumed at a fixed rate, and the provisions of S.44AA relating to the maintenance of books of accounts do not apply to such assessees, which means the assessee declaring his income under the Presumptive Taxation method, is not required to maintain books of accounts.

Fringe benefit tax presumes maintenance of books of accounts, which contradicts with the wordings of these three sections of presumptive taxation.

Employees, or no employees, the tax is attracted

Consider the case of an employer who has no employee at all. Logically he should not be covered and should be excluded from the purview of the tax. However, the way the law has been worded, even such employer would be covered, unless he belongs to the excluded categories like an individual or an HUF. Similarly expenditure, which results in a fringe benefits to partners of a firm or non-employee directors of a company out to be excluded also, since they are not employees of the firm or the company.

The provisions of the law pertaining to the expenditure referred to in this paragraph is likely to be challenged in the Court of Law.

While the individuals and HUF's have been excluded, a partnership firm would be covered by the law. Some assessees may consider dissolving their partnership firms if the impact of the tax is high on them.

Trusts, be careful!

A fund, trust or institution eligible for exemption under section 10(23C) or registered u/s 12AA would be excluded from the provisions of the law. The trusts now will have to be very careful to make sure they continue to remain exempt or registered. The moment they lose such status for any reason, including a technical lapse, the provisions of FBT tax would get attracted

Sickness, and all other excuses barred

A company, which does not pay any tax because of brought forward losses, or a loss making company or a sick company would also not be spared. In many such cases while the liability to tax would otherwise be zero, there could be substantial tax liability because of FBT.

The law is applicable to all employers, excluding an individual, an HUF and charitable trusts and institutions. The earning of business income is not the criteria for taxability, the law clarifies that the tax would be levied on all activities whether or not such activities are carried on with the object of deriving income, profits or gains. The assessees who are not required to pay tax under the Income Tax Act since their income is exempt, and the assessees who do not have a taxable income, or have a loss during a year shall also be liable to pay the fringe benefit tax.

While local authorities are also included in the definition, Governments have been excluded.

No threshold limit

There is no threshold limit for this tax, thus tax would be attracted on every rupee spent by the employer. Detailed enforcement mechanism, including payment of advance tax, filing of returns, levy of penalty, assessment, reassessment etc has been prescribed for the implementation of the FBT.

Self contained law

The fringe benefit tax is 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. It would have been better if the Finance Minister had introduced this as a new Act, instead of being a part of the Income Tax Act!

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 be 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 to the employees" (Memorandum to the Bill).

Are we really moving forward? At a time when India is making every effort to link itself with the rest of the world by reforming the laws and taxes, the need of the hour was to simplify the law and make it more rational, and friendly.

Fringe benefit tax is a step in exactly the opposite direction, it is likely to create a complicated structure with no meaningful benefit to the assessees or the department.

Moreover, the Constitutional validity of a law, which attempts to tax expenditure, resulting in double taxation doubtful. Only time will tell if it can survive if challenged in the Court of Law.