Crazy fringe

Only the government, in its infinite wisdom, will think that the money which a company spends on advertising its products and services is a "fringe benefit" to its employees.

This failure to distinguish between routine business expense and employee benefit goes further, because the new fringe benefit tax proposed by the finance minister in the Budget for next year extends to such everyday activities as holding conferences, travelling on work and""believe it or not""using telephones.

So every time Infosys sends its engineers on assignment in the US, it has to pay a fringe benefit tax to the government equal to 6 per cent of the travel and hotel bill. And if the Confederation of Indian Industry puts together two dozen conferences in a year, then the entire cost of that mainstream activity will be considered fringe benefits for CII employees""and taxed as such.

As for those mushrooming call centres, for which telephone costs are an essential ingredient of the business, well, they will have to pay 3 per cent of those costs as a fringe benefit tax. The revenue to be earned from all this is not pin money.

If you take into account the Rs 15,000 crore spent on advertising and sales promotion and tax it at 15 per cent, the government will pick up a tidy sum of Rs 2,250 crore!

This is not to question the concept of taxing fringe benefits. It is well known that companies provide benefits to employees that do not come under the category of taxable perquisites today.

Nor is it possible in many such cases to work out individual benefits, because they are enjoyed as a group. This could include trips overseas as rewards to sales staff, or substantial gifts at festival time. Taxing these in the hands of the employer is a defensible idea, even if everyone might not agree.

In some ways the idea goes back to the precedent of disallowable expenditure""a concept which fortunately was given up a decade or so ago because it belonged to a socialist past when staying in a comfortable hotel while on a business trip was seen as hedonistic excess.

But even defensible ideas can be applied defectively, and this is what has happened here. As defined in the Budget documents, the proposal also mitigates against service-sector companies, for whom a substantial part of the expense is precisely on such items as holding conferences, making or answering telephone calls, and undertaking extensive travel.

Brand-driven companies, for which advertising and brand building are a core activity, will also bear the brunt. It is obvious, therefore, that the proposal has to be radically altered.

The finance minister is reported to have said that he is willing to re-visit the inclusion of advertising and sales promotion expenses, but that does not go far enough; there remain travel, telephone calls, and other legitimate business expenses.

If all of these are eliminated, as they should be, then the revenue from the measure will probably not be worth the candle. In short, it is best if the whole idea is dropped.