India Inc?s profits are at an all time low; most taxpaying individuals face salary cuts or even worse, pink slips; the stock market is plummeting. For the income tax department, faced with a shortfall of Rs 86,000 crore, this is hardly good news. But three little words?fringe benefit tax (FBT)?are giving it some reason to cheer. The mop-up from FBT remains healthy and is constantly increasing at a much higher rate than the rise in overall direct tax collections.
The tax was introduced in 2005 by former finance minister P Chidambaram as he felt that ?there are many perquisites that are disguised as fringe benefits, and escape tax. FBT is levied on employers? expenses on activities such as entertainment, travel, employee welfare, accommodation and recreation. No surprises then, that it has given companies a lot of trouble as even genuine business costs like phone calls made from the office attract the tax. Till September 2008, just a month before the global turmoil started, FBT collections were rising at 62.23% from a year ago, way higher than the 32.54% increase in overall direct tax receipts. Even in October when the global credit crisis began snowballing, collections from FBT rose by 47% compared to a 29.5% increase in direct tax collections. February 2009 was no different?direct tax collections grew by 11.27% but FBT receipts rose by 20% to Rs 6,267 crore. Analysts say this is because FBT is a function of expenditure. Even if profits of companies register a decline, their expenses can?t go down beyond a certain point.
Travelling, phone and advertising are all costs that companies have to continue bearing, even if they are trimmed down. So, corporate tax receipts may decline but FBT collections will continue to rise.
Employee stock options were brought under the FBT net circa 2007. But here again, these ?extraordinary times? have created an anomaly. Executives who were vested and exercised their Esops when market conditions were better but decided to sell them in recent months may not have made any profit on them. But since FBT is levied at the time of vesting, they would have already paid the tax. The tax men have yet another reason to smile.
surabhi.prasad@expressindia.com