Date:01/03/2006 URL: http://www.thehindubusinessline.com/2006/03/01/stories/2006030102730700.htm

Back A liberal look to fringe benefit tax — FM has delivered what he had promised

Krishnan Thiagarajan

Value in the fringe
Contribution to superannuation funds up to Rs 1 lakh exempt
Celebrity endorsements outside the sales promotion net
Tour and travel expense proportion scaled down to 5 per cent from 20 per cent

The rationalisation of the fringe benefit tax that the Finance Minister had promised in the run-up to the 2006-07 Budget has come through in large measure. Introduced in the last Budget, fringe benefit tax is a tax that the employer pays on perquisites or benefits that employees derive as a result of employment.

Among a long list of expense categories that were brought within the purview of this tax, the heartburn among the corporate community was primarily relating to three: contribution to superannuation funds, sales promotion, travel and conveyance.

Some of the key amendments in this Budget are:

Superannuation funds: The big boost in this rationalisation is the exemption of the contribution made by an employer to an approved superannuation fund up to a contribution of Rs 1 lakh per employee. Any amount in excess of Rs 1 lakh will come under the fringe benefit tax levy. Since this contribution amounts to about 15 per cent of the yearly salary in the range of Rs 6-7 lakh, it is reasonable and in line with the demands of the industry.

This move to tax 100 per cent of the superannuation fund contribution in the last Budget was widely resented as this fund was intended to be a good old age security scheme in the absence of pension funds. In key service sectors such as software and pharma, it also had the potential of being a handy tool to attract and retain talent. Till the latest change, it also amounted to a shift to the TET (Tax-Exempt-Tax) regime against the EET (Exempt-Exempt-Tax) regime for savings schemes, with tax payable only on withdrawal.

Sales promotion: Expense arising from any person of repute used for promoting the sale of goods and services of the business of employers will not be included under sales promotion for valuation of fringe benefits. Celebrity endorsements have been used in sectors such as two-wheelers, soft drinks, beauty products, telecom and OTC healthcare products. Listed companies that prominently use celebrity endorsements are Bharti Tele-Ventures, MRF, TVS Suzuki, Emami, Bank of Rajasthan and Dena Bank. After considering this exemption, 20 per cent of the sales promotion expense of any company will be chargeable to tax at the corporate tax rate of 33.6 per cent (including surcharge and education cess). However, the changes proposed under this head are likely to disappoint the corporate sector.

Tour and travel: Only 5 per cent of tour and travel expenses are to be considered for valuation of fringe benefits as against 20 per cent taken till now. So far, the 5 per cent proportion was enjoyed only by the software, hotels, pharma and construction sectors. Since this is being extended to all listed companies, they will stand to benefit across the board.

Aircraft and shipping companies will also enjoy a 5 per cent limit in respect of hospitality and use of hotels, boarding and lodging provided for passengers, instead of 20 per cent considered so far. Companies such as Jet Airways will stand to gain from this move.