10% cap on taxable value of fringe benefit sought

The Institute of Chartered Accountants of India (ICAI) has submitted to the finance ministry that the taxable value of fringe benefits should be capped at 10 per cent of the expenditure.

ICAI has argued in its post-Budget memorandum that the proposal to levy fringe benefit tax (FBT) on a deemed basis is flawed as it ignores the actual amount of expenditure incurred for extending such benefits to employees.

FBT is being modelled on practices in Australia. In this connection, ICAI points out that even in Australia, fringe benefits are first identified and then computed individually for each employee, and it is only the aggregate of such benefits after identification that the employer is required to pay fringe benefit tax for.

Further, the rationale behind levying FBT in Australia, in the hands of employers, is not owing to the problem of identifying the value of fringe benefits enjoyed in common by employees, but as a matter of policy to recover tax from the employer.

"The government's objective of taxing fringe benefits can be achieved by requiring the employers to deduct tax at source on the value of all benefits, including the ones which are proposed in the Finance Bill as deemed fringe benefits in the income of an employee, while deducting tax at source under Section 192 of the Act," Fiscal Laws Committee Chairman Ved Jain, who has also represented the institute on the FBT Committee constituted by the finance minister, said.

"If employers fail to deduct the tax at source, not only such tax can be recovered from the employers but the full amount of such expenditure should be disallowed for deduction while computing business income of employers in view of a specific provision in Section 40(a)(ia) of the Income Tax Act," Jain said.

ICAI has suggested that even where fringe benefits are capped at 10 per cent, certain expenses such as travelling expenses for personal purposes, scholarship to children and use of employer's car should be considered perquisites in the hands of employees and taxed in their hands.

As travelling, advertising, sales promotion and publicity expenses cannot have any element of fringe benefit for employees, they should not be subjected to FBT.

Small businesses or professions where turnovers or gross receipts are less than Rs 50 lakh, and where the number of employees is up to 20, should be exempted as no significant fringe benefits are provided to employees by the employers.

The ICAI has further pointed out that medical facilities which are not considered a perquisite in terms of the proviso to Section 17(2) should not be the subject matter of fringe benefit tax.

Although the finance ministry has justified the move for the sake of simplified procedure and highlighted the fact that it takes away the discretionary powers of the assessing officer, ICAI believes that the tax will not be able to achieve the desired objective.

This is because FBT makes certain taxpayers pay tax on expenditure, which has no element of benefit to the employee, and at the same time certain other taxpayers end up paying a lower tax despite the fact that the entire expenditure is on providing fringe benefits to employees.