Foul business tax

Though India’s leading businessmen have made a direct pitch to Finance Minister P Chidambaram to do away with the fringe benefit tax (FBT) and replace it, if need be, with a nominal increase in the corporate tax rate (designed to yield roughly the same amount of tax revenue), it appears unlikely that the Budget will spring any pleasant surprises on this score. Mr Chidambaram has promised some simplification, which means the tax will stay. The finance minister is not someone who changes his mind easily. There is the additional factor that the FBT is the kind of tax that appeals to the Left parties since it ostensibly catches taxes that the well-heeled don’t pay by disguising their salaries as perquisites. What the Left may not have figured out is that the FBT may seem to enjoy a socialist hue but this is deceptive because it is not the individual who enjoys the perquisites who pays the tax; it is his or her employer. In that sense, there is no equity argument here. In other words, nothing is lost if the finance minister listens to what corporate India is saying: retain the tax if you insist, but the choice of paying the FBT or an extra percentage point by way of corporate tax should be left to each company to decide. There is no great moral point scored by insisting that the money should be collected as a tax on perquisites.

It is not too late for the finance minister to consider going beyond simplification. He needs to keep in mind that the new tax encourages companies to pay out more (and not less) by way of perquisites since the applicable tax rate on perquisites is in almost all cases lower than even the lowest slab of income tax. At a recent conference of human resource managers in Mumbai, organised by a management association, speakers focused on new compensation strategies. One of the topics was on dealing with the FBT, and the general drift of the suggestions made was that the FBT can be used by companies to lower the tax outflow of employees. The underlying point that may not be immediately obvious is that companies are not objecting to the additional tax burden as much as to the paperwork and other issues involved in dealing with a new tax.

The subsidiary point on the issue is that the finance minister has broken his promise, made repeatedly in response to the first wave of protests last year, that the FBT will be levied only on genuine employee perquisites, and not on ordinary business expenses. This is a promise that he has broken, and some of the irritation with the tax is on this score. It is not clear whether this is what the finance minister will address by way of “simplification”, but he should know that this is only part of the problem. The larger point is that this game is simply not worth the candle. One of the tasks of any taxman is to collect money with the least pain; by that yardstick, the FBT does not pass muster.