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Companies restructure wages to avoid tax on perks, government coffers swell

Companies restructure wages to avoid tax on perks, government coffers swell
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First Published: Thu, Sep 13 2007. 12 52 AM IST

Tanking up: Employees at work at the Convergys office in Gurgaon. A finance ministry official says fringe benefit tax collections should grow once the tax is extended to employee stock options.
Tanking up: Employees at work at the Convergys office in Gurgaon. A finance ministry official says fringe benefit tax collections should grow once the tax is extended to employee stock options.
Updated: Thu, Sep 13 2007. 12 52 AM IST
Collections from a recent tax on perquisites and other benefits offered by companies to employees remained stagnant in the first four months of the current fiscal compared with the same period in 2006-07, but experts and government officials said this was because companies have restructured their salaries, thereby leading to a growth in overall tax collections.
That would mean that the tax is achieving what it set out to do.
The tax, the so-called fringe benefit tax or FBT, was introduced in 2005 amid
Tanking up: Employees at work at the Convergys office in Gurgaon. A finance ministry official says fringe benefit tax collections should grow once the tax is extended to employee stock options.
much consternation among companies. It seeks to tax salary components that were not previously taxed, as also spends by companies under heads such as its executives’ travel and participation in conferences.
FBT collections between April and August stood at about Rs1,050 crore, almost the same as the amount that was collected in the corresponding period fiscal 2007, said a senior official at the finance ministry, who did not wish to be named.
Experts said this was because companies have included most perquisites and benefits in the salary itself. “Companies have restructured salaries to lessen the incidence of FBT and simultaneously increased the aggregate salary to offset the restructuring,” saidPallavi Joshi Bakhru, partner, taxation & advisory services at audit firm Grant Thornton India.
The result is a growth in tax collections (as salaries have grown, not just from the yearly increment but also from the restructuring, so has the tax collected on them).
In the first four months of this fiscal year, aggregate direct tax collections increased 42% on-year to Rs61,030 crore. The growth was driven by both corporate tax and personal income tax (I-T) collections, and came on the heels of 39.27% and 24.43% growth in direct tax collections in 2006-07 and 2005-06, respectively.
Officially, the finance ministry did not release stand-alone data on FBT for the April-August period of 2007-08. Instead, it included it in the total collections of personal income tax, which grew 34% on-year to Rs27,206 crore.
FBT collection in 2006-07 was Rs5,323 crore; it was Rs4,772 crore in 2005-06, the year it was introduced.
Finance ministry officials and tax practitioners said the FBT data for the April-August period did not include collections coming out of employees stock option scheme (Esop) as guidelines on the valuation of these are yet to be notified. Once the tax inflows on account of Esops start, FBT collections should witness growth, said a finance ministry official.
Even in the absence of Esop-related inflows, there seems to be a general consensus among experts that FBT has played a part in moving salary structure towards greater transparency. However, experts disagree on the extent of FBT’s influence.
“I think it is one component in the overall move to transparency,” said Gaurav Taneja, partner at audit and consulting firm Ernst & Young. Taneja also said too much should not be read into relationships between FBT and other components of direct tax as the former is linked to expenses incurred, while the latter, including corporate tax and personal income tax is linked to salaries and profits.
“There is a certain merit to it (FBT resulting in transparent salary structures). But the trend towards simplification has been there very distinctly for a decade,” said K. Pandia Rajan, managing director and chief executive officer of staffing services and search firm Ma Foi Management Consultants Ltd.
“(The) beat-the-taxman kind of approach doesn’t pay (as far as salary structures are concerned),” added Rajan.
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First Published: Thu, Sep 13 2007. 12 52 AM IST