Do only lawyers understand Budget fine print?

DEBATE

Gourab Banerji
Senior Advocate
Supreme Court of India

As soon as the finance minister's Budget speech is over, industry and media go into a frenzy and subject the proposal to intense scrutiny. Indeed, even before the speech is concluded, you see the proposals have already become the subject matter of television talk shows.

Spokespersons of various political parties jump into the fray, and their comments are invariably based on political considerations.

This year was no different. While the initial reaction to the general Budget 2005-2006 was quite positive, two issues proved to be controversial.

The introduction of the fringe benefit tax had the industry up in arms. The withdrawal tax, upset the salaried class that felt they were being taxed on their legitimately-earned income.

It is in this context that the finance minister made a statement that most people do not understand the fine print of the Budget and arrive at misplaced conclusions.

Though the FM's comment betrayed his irritation at what he perceives to be unjustified criticism, there is more than an element of truth in what he said.

The presentation of the Budget is a long and complex process with inputs from economists, policy makers and so on. Ultimately, however, the process results in a legally binding document.

As is only too well known, legal language has its own nuances and pitfalls. The FM, being a distinguished senior lawyer, understands this well.

In fact, without an understanding of the legal process and the fine print, people may draw wrong conclusions.

The Budget is nothing more than an annual financial statement, which is required to be laid before both Houses of Parliament under Article 112 of the Constitution. It is a proposal reflected in the form of a Finance Bill.

There is an elaborate procedure provided under the Constitution and the Rules of Parliamentary Procedure before it becomes law in the form of the Finance Act.

The entire Budget session is supposed to be devoted to discussing the proposals and amendments to the Finance Bill, if necessary.

Necessarily, the Finance Bill is couched in legal language. It requires the assistance of skilled professionals to understand the exact implications of the proposed law.

One can mention from experience that the quality of legislative draftsmanship has rapidly declined since Independence. The Supreme Court has, in many cases, commented upon poor draftsmanship by the legislature where they have been required to step in to iron out the creases.

At the same time, the best draftsmanship in the world cannot take care of every possible situation. One can only endeavour to make the language consistent with the object of the provision.

This is what seems to have happened where the fringe benefit tax is concerned. It seems like a case where loose draftsmanship has created a problem.

In fact, the FM has clarified that the tax would stay but he would look at the provision in order to ensure that legitimate business expenses were not taxed. Incidentally, fringe benefit tax is not a novel concept and is prevalent in Australia and New Zealand.

Similarly, in the case of cash withdrawal tax, the FM clarified that the idea of the tax was not to raise revenue, but to keep a track on black money.

He has also clarified that the quantum of tax could be reduced since it was merely a proposal.

This is not the first time that a huge ruckus has been kicked up on issues, which, in hindsight, do not have any major impact. Consider last year's concern when there was a lot of hullabaloo about the filing of an Annual Information Return.

In response to the criticism, the Budget announcement was modified in the Finance Bill.

Yet, after the passing of the Finance Act in August 2004, when the Income Tax (17th Amendment) Rules, 2004, were brought into force, which provided for an Annual Information Return to be furnished in respect of specified transactions registered or recorded during the financial year beginning on, or after April 1, 2004, the controversy had completely died down.

Similar was the case with the securities transaction tax that was retained in the Finance Act, though the post-Budget amendment reduced the tax burden on stock brokers, portfolio investors and day traders.

Interestingly, the apprehension that the tax was likely to result in significant loss to the government or promote speculation in the stock market does not seem to have materialised.

No doubt there was some fine tuning required in both cases, as would be with the fringe benefit tax and the cash withdrawal tax.

I feel that people should be a little patient, take the advice of professionals who are conversant with the fine print of the Finance Bill, and only then come to a reasonable conclusion.

I would also emphasise that the Budget is a proposal and not the final legally-binding document; there is time to correct anomalies and make improvements.

Shyamal Mukherjee
Executive Director
PricewaterhouseCoopers

Through this year's Budget, the finance minister has sought to widen the tax base. However, though the Budget proposals on personal tax have provided the expected relief to the salaried class, the proposals on the corporate tax have met with stiff opposition, particularly the proposed fringe benefits tax (FBT) on employers.

In his Budget speech, the finance minister has explained the rationale of the FBT as a tax on employers on indirect benefits that are not directly attributable to the employees and, therefore, are better taxed at the level of the employer.

The opposition to the tax is on two grounds "" the tax defies economic rationale and in its current form, the ambit and scope of the proposed tax is nowhere confined to the express intent as outlined in the FM's Budget speech.

Further, admittedly the said tax will impose additional compliance and litigation costs on employers and, thereby, militates against the basic principle outlined in the Budget speech on improving overall compliance and reducing compliance cost.

In his post-Budget interaction, the FM has been quick to defend the economic argument in favour of the new levy by citing certain international precedents such as Australia, which has a similar tax.

As an independent commentator on fiscal laws, the proposed FBT throws up many interesting issues that are legal, constitutional and economic. I think it may be useful to step back and look at what fringe benefits are and how they are currently treated under the tax law without accounting for changes brought about by the recently notified Income Tax 7th Amendment Rules, 2005.

Section 17(2) of the Income Tax Law provides an inclusive definition of the term perquisite. The term includes any sum paid by the employer in respect of the obligation of the employee and also the value of any other fringe benefit or amenity which may be prescribed.

The prescribed benefits as per Rule 3 are all encompassing and include every imaginable benefit including the value of company-provided car, servants, free or concessional educational facilities, value of free meals provided by the employer in excess of Rs 50 a meal and so on.

The point is that not only is it possible to tax all "real fringe benefits" in the hands of the employees but the government already collects tax on the same.

The current system of taxation of fringe benefits is considered fair and transparent by employers and employees. It also provides for certain de minimis exceptions (a legal principle that law does not take care or notice every trifling matter) whereby certain minimal amounts incurred by the employer on ceremonial and customary occasions like festivals are not even accounted for as fringe benefits though expense in excess of the de minimis threshold are fully taxable.

The FBT now chooses to obfuscate the existing fair/ transparent and easy to operate system with a complicated dual levy where some benefits would be taxed in the hands of the employees and other in the hands of the employer as a FBT.

Unexplainably, in the process were expenses that by no stretch of imagination are fringe benefits in anybody's hands, for instance, sales promotion, conference expenditure and so on.

If one were to focus on the issue from a purely legalistic viewpoint, it is the considered view of many informed legal experts that the proposed levy in its current form suffers from legal infirmities and would require the service of a more than indulgent Supreme Court in case of a constitutional challenge on the grounds that a tax is sought to be imposed on sums that do not constitute the "real income" either of the employer or the employee and, therefore, beyond the legislative authority conferred on the Union Government by virtue of Article 246 (List 1 of the Seventh Schedule) read with Article 265.

It is strongly arguable that the tax is prima facie discriminatory, that is, it allows the government and its departmental undertakings to incur expenditure on the fringe benefits as defined in Finance Bill, 2005 without being subject to this levy while similar expenditure, if incurred by a private enterprise, would trigger a fringe benefit tax.

Having examined the economic and legal implications of the FBT, all of which lead us to different answers, the question is: what is the immediate solution to the problem?

Different experts will have varying views but I feel the immediate solution that the FM could consider is defer the levy of this tax by one year and appoint an expert committee to examine the entire gamut of issues associated with imposition of a FBT and, thereafter, come up with more well-reasoned proposals next year.

(The views expressed are personal)