Editorial

Tax is an essential source of revenue for the Government. What is expected and accepted is the rational tax structure. Simple tax laws help and assist in better administration by the tax department. Complex tax laws increase litigation and promote tax evasion and corruption. The Government assures the simple tax laws, but, however, in practice the outcome is otherwise. One such example is the new tax called the ‘Fringe Benefit Tax’ (FBT), recently introduced by the Hon’ble Finance Minister Shri P. Chidambaram by the Finance Act, 2005. On the one hand, the Finance Minister reduced the corporate tax from 35% to 30% as a measure of rationalization, and on the other hand, he justified FBT by stating that it has the effect of increasing the tax rate only by about 1.5%. Looking into the complexity and the paper work involved it was suggested that the new tax; i.e., FBT may be withdrawn and that the tax rate may be increased by 1.5% or any other appropriate rate so as to compensate the revenue loss. However, this suggestion was not accepted.

In his budget speech on 28-2-2005, Finance Minister clearly stated that the only object and purpose of FBT is to levy tax on fringe benefits, which was intended to be levied in the hands of the employees but could not be levied in view of the fact that such benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees.

However, the provisions of section 115WB and section 115WC raised serious doubt as regards the scope of the new levy. Apart from other complexity, one issue was as to whether an expenditure simpliciter without any nexus with the employee would be subject matter of tax as fringe benefit. An isolated reading of section 115WB(2) showed that there is no restriction of any nexus with the employee as regards the expenditure referred to in Clauses A to P in that sub-section. If the said sub-section is read with sub-section (1) then the nexus with the employee would be implied. In the absence of the nexus with the employee the tax will be on pure and simple expenditure and not a tax on income. This does not seem to be the intention of the legislature on a proper reading of the new provisions as a whole. The following facts also supports this view.

Further, FBT is levied in Chapter XIIH in the Income-tax Act, 1961, and as such has been levied in the exercise of powers conferred on the Parliament under Entry 82 of List I of Seventh Schedule to the Constitution as a tax on income. It is proposed to be tax on income of an employee, in the nature of perquisite or fringe benefit, which is not taxed in the hands of the employee in view of the reasons specified above. To this extent there may not be any question of constitutional validity. However, the question is as to whether such fringe benefits could be presumed irrespective of the nexus with the benefit to the employees and whether it is intended to tax expenditure in excess of what could be a reasonable expenditure attributable as a benefit to the employees. If the expenditure could be taxed independent of such nexus then it would not be tax on income but tax on expenditure, which is beyond the scope of the said Entry 82 and the Income-tax Act, 1961. Such a levy would be unconstitutional and invalid.

The Circular No. 8 of 2005 issued by the CBDT has answered 107 questions so as to clarify some of the issues. To some extent this circular has resolved and reduced the doubts of the assessees. However, it has given rise to a number of new issues. Though it is clarified that the employer employee relationship is an essential condition, in the answers to a number of questions it is stated that even an expenditure unconnected with an employee or benefit to the employee will be a subject matter of tax in view of section 115WB(2). A number of Writ Petitions have been filed challenging the new levy mainly on the ground that it is a tax on expenditure and not a tax on income. Two High Courts have already admitted the petitions and have also granted interim relief to the petitioners. Many more petitions are expected to come. Thus, the circular, instead of resolving the complexity has added to the confusion and litigation.

In July, 2005 we had covered the issues under the FBT as a Special Story in the Journal. A number of members have now requested for a Special Story on the issues arising out of the said Circular No. 8 of 2005.

In January 2003, we had published the Special Story on ‘Assessment’. On request of the members, so as to update and to cover the subsequent developments we have chosen the subject once again. I am thankful to Shri Chandravijay Shah for designing the Special Story. My thanks are also due to all the authors of the Special Story who have given their article in short notice. This issue will be of great assistance and help in the assessment proceedings.

K. B. Bhujle
Editor