The Finance Ministry is contemplating diluting provisions of Fringe Benefit Tax (FBT), by which companies may not have to pay taxes on certain perks and allowances availed of by employees.
Although industry has been pleading for a complete abolition of FBT in the forthcoming Budget, to be presented on July 6, sources said the finance ministry is against it because of revenue implications.
However, they added the ministry is looking at the possibility of diluting the provisions of FBT and may exclude expenses on various items which do not directly benefit employees.
The expenses related to marketing and sales promotion may go out of the purview of FBT as they do not benefit the employees directly, sources said.
"The best thing for the government would be to abolish FBT completely," said Satya Poddar, senior partner, Ernst and Young, adding that the realisation from FBT is less than Rs 10,000 crore, not even 3 per cent of the total direct tax collection.
FBT was introduced by the then Finance Minister P Chidambaram in the 2005-06 Budget to "tax many perquisites (which) are disguised as fringe benefits, and escape tax".
Under the current dispensation, an employer has to pay FBT at 30 per cent on the fringe benefit, the taxable value of which is determined in accordance with a formula.
In case the government is unable to completely abolish the FBT, Poddar said, "the government should at least rationalise the tax by limiting it to only those expenses which directly benefit the employees".
Under the present structure, fringe benefit goes "beyond taxing fringe benefits", he said, adding expenses incurred by companies on marketing and promotion cannot be construed as fringe benefits.
The FBT was introduced by the government in 2005 on expenses incurred by employers towards entertainment, festival celebrations, gift, use of club facilities, provision of hospitality, maintenance of guest houses, conferences, employee welfare, use of health club, maintenance of motor cars, telephone, sales promotion and publicity, etc.
Later in 2006-07, Chidambaram partly rationalised the FBT by excluding certain expenses from the purview of the tax net, like expenditure on distribution of free samples of medicines to doctors.
Besides, the Finance Act 2006 also specified that contribution of less than Rs one lakh in a year towards the approved retirement fund of an employee would not attract FBT.