Fringe benefit tax blow may soften

Taxable value for some activities likely to be reduced.

The finance ministry is considering reworking the taxable value of the fringe benefits proposed in the Budget. The move follows industry's concern that the present proposals go beyond taxing the collective benefits enjoyed by employees.

A senior finance ministry official told Business Standard that the taxable value could be brought down in some cases where the proposed deemed fringe benefits were felt to be high.

The official said the reworked fringe benefit tax structure would also define the taxable expenses more clearly so that genuine business expenditure was not taxed.

"The percentage of expenses in some industry sectors can be reworked to ensure that specific industries do not face unreasonable burden," the official added.

Some of the expense heads that are being given a close look include the expenditure on entertainment, sales promotion, conference and provision of guest houses, where 50 per cent of the expenditure incurred are deemed to be fringe benefit.

The fringe benefit tax on telephone expenses may also be reworked. Finance Minister P Chidambaram has already assured industry chambers that he will look at the fine print to ensure that genuine business expenditure does not attract the tax.

The government, however, is unlikely to exempt loss-making companies from the fringe benefit tax. The official said there were many cases where companies, which were sick and under the rehabilitation scheme of the Board of Industrial and Financial Reconstruction, incurred lavish expenditure on its management and booked them as business expenses.

The official said the government was considering exempting small organisations from the fringe benefit tax. The threshold can be either the number of employees or the turnover.

The reworked fringe benefit tax is also expected to exempt certain small businesses like civil contractors, transporters, and retail traders, who are taxed on presumptions and are not required to maintain proper books of accounts.

Tax experts told Business Standard that prior to 1997, when some of the expenses like entertainment were disallowed for tax purposes, companies used to argue that a part of those expenses were for employees and therefore should not be disallowed.

"The government is probably using the same rationale now to mop up revenue through the fringe benefit tax," said the expert.

The fringe benefit tax, as proposed in the Budget, covers travel benefits, gifts, use of employer's vehicle, holiday trips, incentives, employer-paid educational costs, subsidised meals, recreational facilities and professional membership fees.

The tax may apply even if the benefit is provided by a third party under an arrangement with the employer.