Rationalise fringe benefit tax, not scrap it

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: In the pre-budget meeting of the FM with industrialists, there was a chorus demand for scrapping the fringe benefit tax (FBT) even at the cost of paying 1-2% extra tax. No one seems to have considered why FBT was thought of and what are its strengths and weaknesses. The way the off the cuff demand for withdrawal of FBT was made indicates that no homework was done by the participants in the meeting and about the usefulness of such meetings. In retrospect, one can say that the decision of the former FM, Mr Yashwant Singh, was right in not having such pre-budget meetings.

The problems, concerning FBT, have arose not because of the concept, being objectionable but because the draftsman, while drafting the relevant provisions of FBT exceeded the brief for this tax as contained in the FM's speech (supra) and FM seems to have glossed over this.

There are two aspects of this tax, which emerge from FM's speech namely -

• It is a tax for perquisites, which are disguised as 'fringe benefits', are of considerable value and are going untaxed because neither the employers nor the employees pay any tax on such benefits.

• The employees enjoy the benefits collectively and it is difficult to attribute these individually to different employees. Hence, the same need to be taxed collectively in the hands of the employers.

There cannot be any difference of opinion that both the above-mentioned grounds justify a tax on the benefits collectively enjoyed by employees and the same need not go untaxed.

In the above background, firstly, the suggestion of 12 wise industrialists, who met the FM, needs to be examined. The effect of acceptance of the suggestion would be that while the lesser paid employees would continue to pay tax on perquisites, the controlling and well-paid off people would continue to enjoy the advantage of 'fringe benefits' from the employers/companies collectively without paying any tax. By suggesting a higher tax on the companies, higher burden would get passed on to smaller unorganised shareholders in the form of lesser dividends. This will hardly be just and equitable. What the leaders of industry have failed to appreciate is that the objective of FBT is not merely to get revenue but also to bring about equity in taxation, the aspect that has been conveniently ignored in making the suggestion for scrapping FBT.