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Analysis of Fringe Benefits Tax and Its Collection Pattern

A recent controversial tax policy change has been the introduction of the fringe benefits tax in 2005. The central government claims that it has been introduced to tax those kinds of fringe benefits, which are collectively enjoyed by employees in the form of facilities/amenities and are difficult to identify, segregate, and apportion among beneficiaries for taxation. Accordingly, the tax liability has been fixed on employers, not on employees. The fbt collection data for the first two years have been analysed here to gain insight for further reforming and fine-tuning the fbt regime. fbt collections from various sectors of the economy have been examined and the significant heads of fbt identified. The banking, petrochemical and infotech sectors are the largest contributors, and employee welfare, conveyance and telephone connections are the largest contributing heads of fbt.

SPECIAL ARTICLEEconomic & Political Weekly EPW august 16, 200841Analysis of Fringe Benefits Tax and Its Collection Pattern Praveen KishoreA recent controversial tax policy change has been the introduction of the fringe benefits tax in 2005. The central government claims that it has been introduced to tax those kinds of fringe benefits, which are collectively enjoyed by employees in the form of facilities/amenities and are difficult to identify, segregate, and apportion among beneficiaries for taxation. Accordingly, the tax liability has been fixed on employers, not on employees. The FBT collection data for the first two years have been analysed here to gain insight for further reforming and fine-tuning theFBT regime.FBT collections from various sectors of the economy have been examined and the significant heads of FBT identified. The banking, petrochemical and infotech sectors are the largest contributors, and employee welfare, conveyance and telephone connections are the largest contributing heads of FBT.Praveen Kishore( is at theDirectorate of Income Tax, Ministry of Finance.Taxation is a certainty in today’s world. It is the most impor-tant instrument available to governments for taking away resources from the private sector. Salary income, which is also known as income from employment is generally the most important component of income of individuals in many countries. In general, salary income includes wages, salaries, pensions, gratuity, leave salary, perquisites, allowances and fringe benefits. Taxation of salary income is one source where tax compliance is generally maximum as the tax is deducted at the source itself (called withholding tax) in most countries. Still, ways and means have been devised to reduce the amount of taxable salary. The payment of a part of the salary to employees in the form of non-cash facilities, allowances, fringe benefits and reimbursements is a common way of reducing tax liability.Taxation of various kinds of employees’ fringe benefits has always been a vexing issue for taxation authorities/governments. In most cases, such fringe benefits are either not taxed or are subjected to softer tax treatment. It is primarily due to the fact that such benefits are difficult to identify and still more difficult to apportion among benefited individual employees. Further, there are practical difficulties and administrative inefficiencies in bringing such benefits to tax. However, over a period of time, tax authorities in many countries have come up with different methods for identifying, valuing and taxing such fringe benefits. On the other hand, employers also have come up with novel ways of providing fringe benefits to their employees to avoid taxation. Thus, on many occasions, it has been claimed by tax authorities that the proliferation of various fringe benefits plans is slowly eroding the tax revenue of governments. There is no universally accepted definition of “fringe benefits”. It is generally accepted that fringe benefits provided by the employer to employees cover all advantages other than monetary salary and wages, in consequence to services rendered. Thus, they are a part of employees’ overall remuneration packages but not in the form of cash payments. Some exceptions can also arise, for example “entertainment allowances” or other cash expense allowances granted/reimbursed to an employee, which exceeds his or her actual expenses incurred. Sometimes, an employer may also have a statutory obligation to provide a benefit(forexample,employees provident fund contribution by employers in India). In some countries, including India, a distinc-tion is made between wages/salaries in kind (often called per-quisitesinthosecountries) and other fringe benefits. Examples of the “in kind” components of salary may be rent-free accommoda-tion or a free car provided by the employer. With the introduction
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SPECIAL ARTICLEEconomic & Political Weekly EPW august 16, 200845of the fringe benefits tax (FBT), this distinction has been made more prominent in India.The most important justification for taxation of fringe benefits is fairness and equity of a tax system. Although the concept of equity in taxation is generally accepted as a desirable objective, it often poses a difficult practical problem in implementation. The notion of “horizontal equity”, which suggests that “equals should be treated equally”, in turn implies that employees/taxpayers in receipt of an equal economic remuneration should pay an equal amount of tax irrespective of the mix (cash, kind or facilities) of the remuneration package. Due to this reason, softer/favourable taxation of fringe benefits may be unfair for those who cannot take advantage of such benefits. Similarly, “vertical equity” implies that “unequals should be treated unequally”. Clubbing this concept with the idea of progressive taxation requires that the taxpayers’ amount of tax liability and average rate of tax should increase as their income increases. It is generally accepted that highly paid executives are more likely to receive a greater share of their remuneration in the form of fringe benefits. This being the case, a soft fringe benefits tax regime also violates the principle of vertical equity and reduces the progressivity of the tax system.Another justification for taxing fringe benefits is that of ero-sion of the tax base. When fringe benefits are subjected to a soft and favourable tax treatment, it erodes the tax base and tax rev-enues are lost. It has been apprehended that the loss in tax reve-nue and erosion of tax base may be significant when this process of soft tax treatment continues for a long time. The spread of fringe benefits can have some broader economic implications also. It can affect resource allocation and market structure.Despite these economic arguments favouring taxation of fringe benefits, tax authorities the world over have faced numerous practical and administrative difficulties in their efforts to bring fringe benefits to tax. The vexing issues of its identification, definition of its base, valuation rules, record keeping require-ments and administration have often thwarted numerous efforts towards an effective and efficient taxation of fringe benefits.1 Fringe Benefits Tax in IndiaA brief outline of the FBT in India:1.1 MeaningandApplicationRecently, Indian income tax authorities have come up with a creative though highly controversial way of taxing fringe benefits. In the annual budget of 2005, the finance minister introduced a new tax called the “fringe benefits tax”. It is a tax that the employer (not the employees) pays on perquisites or benefits that his employees derive as a result of employment. The taxation of fringe benefits has been justified by the government both on grounds of equity and economic efficiency. However, this tax has been vehemently opposed by the corporate sector, trade associations as well as by substantial sections of academia. It is claimed that in the age of fiscal and taxation reforms, such a tax is a retrograde step.The tax is payable by a certain class of employers on the value of fringe benefits provided or deemed to have been provided by them to their employees. The deeming provisions are a presumptive method of valuation of fringe benefits wherein the tax is ap-plied to certain heads/categories of expenditure as a measure/indicator of fringe benefits. The Indian Income Tax Act already contains provisions relating to the taxation of various kinds of perquisites and allowances, which employees receive in addition to their salary or wages. These perquisites are taxed as a part of salary income. Therefore, with the introduction of the FBT, the relevant provision relating to taxation of various perquisites has been amended to make them coterminous with the new provisions of the FBT. 1.2 Tax Base, Valuation and RateA mixed category of expenses, which are generally incurred by employers for providing benefits/facilities to employees either at the workplace or otherwise has been defined as the base for the FBT. A comprehensive and specific list of such expense catego-ries/heads have been enumerated in the Income Tax Act. Through the deeming provisions, a particular percentage (which varies from 5 per cent to 100 per cent) of such categories of expenses has been declared as “deemed to have been incurred for provid-ing fringe benefits to the employees” of the organisation and this becomes the value of fringe benefits. The FBT is applicable to this value at a flat rate of 30 per cent with an applicable surcharge and cess. At present, there are 20 such heads of expense. Table 1 gives a snapshot view of the base and valuation of FBT system.Further, in the case of some sectors of the economy, the valuation base has been kept low for certain kinds of expenses, considering the special nature of the business. For example, for employers Table 1: FBT Heads and Valuation Base Rate Expense Heads Specified as FBT Base Valuation Rate (as a % of Expense)Contribution to superannuation fund (above Rs 1,00,000 per employee per annum) 100Free or concessional ticket 100Value of employee stock ownership plans* 100Entertainment 20Hospitality of any kind by an employer 20Conference excluding fee for participation by employees in any conference 20Sales promotion including publicity but excluding specified expenditure on advertisement 20Employees’ welfare 20Conveyance @ 20Use of hotel, boarding and lodging facilities 20Repair, running (including fuel) and maintenance of motorcar and the amount of depreciation thereon 20Repair, running (including fuel) and maintenance of aircraft and the amount of depreciation thereon 20Use of telephone (including mobile phone) 20Maintenance of any accommodation in the nature of guest house 20Festival celebration 50Use of health club and similar facilities 50Use of any other club facilities 50Gifts 50Scholarships 50Tour and travel including foreign travel @ 5*Introduced from financial year 2007-08.@ These two heads were together in the first year with a valuation base of 20 per cent and have been separated as two distinct heads with different valuation base from the second year, i e, 2006-07.Source: Central Board of Direct Taxes.
SPECIAL ARTICLEaugust 16, 2008 EPW Economic & Political Weekly46engaged in the computer software business, the value of fringe benefits arising from conveyance expenses has been fixed at 5 per cent of conveyance expenses, instead of 20 per cent, which is ap-plicable to other sectors. Table 2 gives the details of economy sec-tors and concessionalFBT valuation base for these sectors. TheFBT is administered with income tax and there is a common tax return form. Other provisions of administration, assessment and tax payment, etc, have also been made coterminous with the income tax system in India.2 CollectionAnalysis TheFBT was introduced in the financial year 2005-06. Since then, three years have passed. Although there has been a strong demand from various corporate lobbies for the removal of this tax on grounds of its perceived inefficiency, weird logic and increased compliance cost for taxpayers, the government does not appear to be in any mood to accept this demand. On the contrary, “value of employee stock ownership plans (ESOP)” has been included as one of the fringe benefits in the last budget. Without delving too deeply into the argument about the desirability of the FBT and the efficiency and effectiveness of the Indian mechanism to tax fringe benefits, which is the subject matter of another article, an attempt has been made to analyse FBT collection data for first two years of its operation. No such analysis of the FBT collection pattern has been attempted in India. There has been general discussion on the FBT in India but the researcher could not find any serious empirical study in this regard. In general, tax policy analysis and related empirical studies have largely been neglected by researchers andacademicians. One of the important reasons for inadequate empirical research in this area is the lack of availability of reliable data. The data in the income tax department itself is not easily available and its access to outside researchers is even more diffi-cult. In the light of its recent origin and controversial nature, this paper is an attempt at analysing the collection of FBT to gain insight and derive meaningful observations for further reforming, fine-tuning and modifying the FBT regime. 2.1 Research Design and Data CollectionStarting from 2006-07, paperless electronic filing (popularly called e-filing) of income tax returns (includingFBT returns) has been made compulsory for corporate taxpayers. It has been extended to firms also from 2007-08. This facility has greatly facilitated the present exercise of collection as well as analysis of data. The data for the present study has been taken from FBT returns electronically filed by corporate taxpayers for 2005-06 and 2006-07. For this purpose, special permission was granted to the researcher by the Central Board of Direct Taxes, ministry of finance, government of India to access and use the electronic data from the returns of tax of around 1,000 top FBT payers for financial years 2006-07 and 2007-08.1 There are only two years for which FBT return data was available at the time of the study. The return for the third year, i e, 2007-08 is due during 2008-09, the last date for filing of return being October 31, 2008. Since the data relating to tax returns are personal and pro-prietary in nature with the income tax department being only a custodian, the names of individual companies/taxpayers have not been disclosed in the report. Instead, the industry segment, which a particular taxpayer represents has been taken as a basic unit of analysis. For 2005-06, tax return data for the top 1,000FBT payers were filtered and collected for some selected fields. For 2006-07, again, data for the same top 1,000 taxpayers were filtered and collected. Naturally, the rank did not remain the same over the years. Thus, the individual taxpayers in the top 1,000 list for both the years are not exactly same, though majority of them are same. The data so obtained was then cleaned. Finally, data with respect to 965 and 987 taxpayers remained for 2006-07 and 2005-06, respectively. As we see in the following section, data for the top 350 FBT payers have mostly been used for detailed analysis. 2.2 Overall Collection of FBT and ABC PatternAlthough the imposition of theFBT has been controversial due to various reasons, if we see its collection figures within overall direct tax collection, it is not very significant. Table 3 gives the direct tax collection figures for past three years of the operation of theFBT. FBT collection as a percentage of total direct tax collec-tion has been around 2.8, 2.3 and 2.2 per cent in the first three years, thus showing a slow decline in its contribution to total collection. However, it has shown a growth rate of 11.5 per cent and 26.7 per cent in 2006-07 and 2007-08, respectively. The growth of 11.5 per cent in 2006-07 is significant because the provisions of the FBT were slightly relaxed in this year. Even then, in percentage terms, it does not appear to be an important contributor in total direct tax collection. How-ever, it must be noted that for a resource starved country, an additional Rs 60-70 billion is not a small sum. Next, the analysis of collection figures shows that FBT collec-tion is showing anABC pattern. This means that out of the total Table 2: Concessional Economy Sectors for FBT Valuation FBTHeads Hospitalityof Conveyance UseofHotel, Running, Business Activity/ Any Kind Boarding, and Depreciation, Economy Sector Lodging Repair of CarFBT Valuation Base (% of expense incurred) Airline and air cargo 5 – 5 –Construction –5––Computer software – 5 5 –Hotel 5 – – –Pharmaceuticals –55–Shipping 5 – 5 –Transport (goods and passengers) – – – 5All others 20 20 20 20Source: CBDT.Table 3: Collection of Direct Taxes (in Rs million)Components of Direct Taxes Financial Year 2005-062006-072007-08 (Provisional)Corporate tax 10,12,770 14,32,600 18,82,620Income tax 5,59,850 7,60,350 10,39,240Fringe benefits tax 47,723 53,230 67,430Securities transaction tax 25,590 46,480 85,770Banking cash transaction tax 3,210 5,020 5,730Other taxes (including wealth tax) 3,010 3,230 6,500Total direct taxes 1,652,150 2,300,910 3,087,290Source: CBDT.
20 7
20 06 0 7 05 6
SPECIAL ARTICLEEconomic & Political Weekly EPW august 16, 200849bases for different category/heads of expenses, an opportunity to avoid the FBT still remains. Employers can book expenses under those heads where the valuation base is low (20 per cent), if that is possible. 2.5.1 Head-wiseCollectionPatternThere were 18 heads of expenses, which were included in the FBT base in the first year of its operation, i e, in 2005-06. How-ever, the head conveyance, tour and travel of 2005-06 was broken up into two heads in 2006-07, namely, conveyance and tour and travel and valuation base for tour and travel was reduced to 5 per cent of total expenses, whereas it remained 20 per cent for conveyance. Therefore, total number of heads became 19 in 2006-07. The head-wise collection for 2006-07 (top 1,000 and 350 taxpayers) has been analysed and summarised in Table 6. Employee welfare is the largest contributing head followed by conveyance, telephone, repair, running and depreciation on car, sales promotion and use of hotel, boarding and lodging facilities in that order. Similar analysis has been done with the collection figures for the year 2005-06 and is summarised in Table 7. Contribution to superannuation fund was the largest contributor in 2005-06 with a share of around 40 per cent, followed by con-veyance, tour and travel, employee welfare, telephone and sales promotion. This high collection from contribution to superannu-ation fund was due to the fact that the whole contribution made by employers was taken to be the base for valuation. On represen-tation from various sectors, relevant provisions were modified and from 2006-07, only contributions above Rs 1,00,000 per employee per year are taken as the base for valuation. With this change, the per cent collection from this head has decreased drastically to around 4 per cent of total collection of FBT in 2006-07. It is also noticed that the proportion of collection from different heads did not change much by increasing the sample size from 350 to 1,000. In 2006-07, for the top two heads, it has slightly decreased whereas for the next five heads, it has slightly in-creased. There isnoclearpattern of increasing or decreasing trend with an increase in sample size. This is in conformity with the assumption that the data set of 350FBT payers is a representative sample.The two-year data on head-wise FBT collection was com-pared. The results are given in Figure 3 (p 48). As noted earlier, collection from contribution to superannuation fund and con-veyance, tours and travel has decreased in 2006-07. The reason has already been discussed.2.5.2 Running and Maintenance of AircraftIn the sample data, the head “running, repair, depreciation on aircraft” is conspicuous because its contribution is nil for as many as seven sectors of the economy. These sectors are bank-ing, electrical/electronics manufacturing, fast moving con-sumer goods, infotech-software, insurance, service-financial-consultancy and telecom service. However, in overall terms it ranks 11th contributing 1.65 per cent of total FBT collection. Further, in the case of five sectors of the economy, it is among the top 10 heads contributing 5-10 per cent of total FBT on an average. These sectors are automobile (5.8 per cent), construc-tion (4.2 per cent), petrochemical (5.9 per cent), steel (10.6 per cent) and transport-hotel-tourism (8 per cent). Due to its special nature and the peculiar collection pattern, this head can be made applicable to only those five sectors of the economy where its contribution is above 5 per cent. Alterna-tively, it can be made applicable to an additional 10 sectors of the economy, where it is contributing something and can be Table 6: Head-wise Distribution of FBT Collection for 2006-07 FBT Heads Top 350 FBT Payers Top 1,000 FBT Payers Amount of % of Total Amount of % of Total Fringe Benefits Fringe Benefits ( Rs Million) (Rs Million) Employee welfare 11,955.01 22.16 14,649.21 20.92Conveyance 8,018.0714.86 10,172.60 14.52Telephone 5,014.919.306,938.889.91Rep, runn, dep on car 5,021.94 9.31 6,921.80 9.88Sales promotion (and publicity) 4,805.57 8.91 6,294.84 8.99Use of hotel, boarding 4,581.93 8.49 6,228.93 8.89Tour and travel 3,116.51 5.78 4,405.72 6.29Gifts 2,991.815.553,716.085.31Contribution to superannuation fund 2,232.53 4.14 2,721.88 3.89Conference 2,073.67 3.842,643.63 3.77Rep, runn, dep on aircraft 887.77 1.65 998.14 1.43Entertainment 742.421.38987.911.41Hospitality 757.271.40970.831.39Maintenance of guest house 669.91 1.24 920.83 1.31Scholarships 403.540.75463.870.66Festival celebration 223.97 0.42 407.33 0.58Other club 237.13 0.44 334.30 0.48Free/concessional ticket 138.86 0.26 180.72 0.26Health club 74.85 0.14 110.35 0.16Total fringe benefits 53,947.66 100.00 70,067.85 100.05Fringe benefits tax 18,071.06 23,488.21 Source: CBDT.Table 7: Head-wise Distribution of FBT Collection for 2005-06 FBT Heads Top 350 FBT Payers Top 1,000 FBT Payers Amount of % of Total Amount of %of Total Fringe Benefits Fringe Benefits (Rs Million) (Rs Million)Contribution to superannuation fund 38,200.62 45.46 40,541.91 39.60Conveyance, tour, travel 15,267.50 18.17 21,101.40 20.61Employee welfare 8,995.89 10.71 11,265.80 11.01Telephone 4,358.115.196,098.135.96Rep, runn, dep on car 3,968.71 4.72 5,651.07 5.52Sales promotion (and publicity) 4,118.82 4.90 5,582.35 5.45Use of hotel, boarding 2,648.56 3.15 3,532.06 3.45Gifts 1,863.332.222,464.38 2.41Conference 1,399.491.671,851.351.81Entertainment 627.190.75839.760.82Maintenance of guest house 505.98 0.60 715.38 0.70Hospitality 528.300.63708.100.69Rep, runn, dep on aircraft 609.75 0.73 710.24 0.69Scholarships 326.740.39386.840.38Other club 226.58 0.27 315.45 0.31Festival celebration 155.61 0.19 282.88 0.28Free/concessional ticket 173.53 0.21 237.63 0.23Health club 66.92 0.08 93.27 0.09Total fringe benefits 84,041.62 100.01 1,02,377.99 100.01Fringe benefits tax 28,213.45 34,370.18 Source: CBDT.
SPECIAL ARTICLEaugust 16, 2008 EPW Economic & Political Weekly50removed from the FBT base from the seven sectors where its contribution is nil. 2.6 Identifying Important and Unimportant HeadsFBT heads are the building block of FBT systems. There has been wide-ranging debate on the nature of different FBT heads and justification for including or excluding the same in the FBT base. It has been vehemently argued by the government that all heads have been included in theFBT base only after due consideration and serious thought. The debate is closely related with the issue of classification and standardisation of expenses heads and complete liberty available to business organisations for booking expenses. Against this backdrop, it is examined which heads are significant and which are not from the point of view of their contribution to the total FBT collection and their distribution in different sectors of the economy. The FBT returns data for 2006-07 only (having 19heads of expenses) has been used in this analysis because the collection data for this year is more stable and balanced, repre-senting the changes made in some of the provisions.2.6.1 Top 10 and Bottom Five HeadsAn analysis of largest and smallest contributing heads has given some interesting insights. However, this analysis has been done only for the collection figures of 2006-07. There are about 10 FBT heads, which are major contributors, sharing among themselves more than 90 per cent of total FBT collection. Similarly,thecumulative contribution by the bottom five heads is only around 2 per cent of total FBT collection, with the least contributing head health club contributing as less as 0.14 per cent of total FBT collection. These can be seen in Table 6. Next, we would like to know whether such a pattern of top and bottom heads is evident even for separate sectors of the economy. For this purpose, the data was furthersegregated for each of the 22 econ-omysectors. This has given insight into what is the proportion of collection from the top 10 and bottom 5 heads in the dif-ferent sectors of the economy. It is seen that for most of the economic sectors, these top 10 heads are indeed contributing more then 90 per cent of total FBT collec-tion, except for the automobile, petro-chemical, steel and transport-tourism sec-tors. However, in these four cases, when the top 11thFBT head (being running, re-pair and depreciation on aircraft) was in-cluded the total contribution became more than 90 per cent. Thus, even on segregating data on the basis of sectors of the economy, the top 10 heads are found to be the same for all the sectors of the economy contributing almost 90 per cent of total FBT collection. However, within these top 10 heads, the proportion of contribution by different heads has been found to differ for each economy sector. Thus, employee welfare is not always the top-most head for each sector of the economy. Similarly, it is found that the contribution of the bottom five heads did not exceed 2 per cent for most of the sectors. Further, for as many as 10 sectors of the economy, this per cent was as low as 1 per cent or less. These results are given in Table Removal of Unimportant Heads and Booking of ExpensesOn the basis of the above analysis, it is easy to conclude that the bottom five heads of FBT, namely scholarship, other club, festival celebration, free or concessional ticket and health club, which are contributing to minuscule amounts ofFBT, can be removed from theFBT base without significantly affecting its collection. However, such a conclusion would be simplistic. The issue is closely linked with the issue of classification of expenses and discretion available to business organisations to book expenses under any head. As of now, there is no standard procedure or classification system for the booking of expenses by business organisations. It solely depends on the accounts/finance department to devise or determine a head and book an expense under it. No guidelines or accounting standard have been issued by the Institute of Chartered Accountants of India for this purpose. What is generally found in the books of account of large organi-sations is a broad four- or fivefoldclassificationofallexpenses into manufacturing, selling, employees, administrative and mis-cellaneousexpense heads. These broad heads are then subdi-vided into various specific heads for the booking of expenses and there is no uniformity even for naming a specific head. This gives complete discretion to an organisa-tion for classifying and booking an ex-pense. The classification issue is a com-plex one. It should also be realised that duetothecomplex nature of modern busi-nessenterprises and diversity in the nature andtypeof expenses incurred in the courseof business, it is very difficult to have a practicable classification system and standardised bookingofexpenses.It may be noted that out of the bottom five heads, four are those where the base/valuation rate is 50 per cent of the total expense. Further, these four heads are such that the expense made for these purposes can also be booked under other heads of expense, notably employee welfare. Employee welfare is a general type of head, which can include expenses in-curred for providing scholarship, festival celebration, etc, and doing so would per-fectly be within the four corners of the law. However, when done, it will have the impact of reducing theFBT liability due to differential valuation bases for these heads of expense. Prima facie, it may be the reason Table 8: Contribution by Top 10 and Bottom Five Heads (2006-07, as % of total)Economy Sector Contribution Contribution by Top 10 by Bottom 5 HeadsHeads Agro-food-beverage 93.141.87Automobile-ancillary 84.164.21Banking 92.191.11Chemical-fertiliser 95.481.37Construction 89.991.34Diversified 89.822.59Electrical/electron manufacturing 93.65 0.98Engineering manufacturing 95.31 1.06Fast moving consumer goods 97.39 1.58Infotech-ITES 91.641.15Infotech-software 93.920.74Insurance 95.890.50Media-entertainment 95.501.40Minerals-metals 93.140.83Petrochemical 87.470.91Pharma-drugs-biotech 96.270.96Power-energy 94.370.51Services-financial-consultancy 94.61 1.73Steel 80.89 0.95Telecom service 96.89 0.95Trading-retail 94.391.64Trans-hotel-tourism-storage 83.163.00Total 92.332.01Source: CBDT.
SPECIAL ARTICLEEconomic & Political Weekly EPW august 16, 200851why the heads with 50 per cent base are the least contributing ones and also why employee welfare isthe largest contributing head. However, it would be too naïve to arrive at such a conclu-sion on the basis of above analysis.What is needed is further analysis of the data before making any observation regarding removing some of the least contribut-ing heads from the FBT system. Some advanced analysis and statistical tests were conducted to further probe the issue. The details of these tests will be put together in a subsequent paper. Here, it is sufficient to mention that some initial statistical tests doindicatethat there is a high level of heterogeneity in the sample data, indicating an arbitrary booking of expenses, perhaps to avoid the FBT. In such a situation, it would perhaps not be appropriate recommending the removal of the least contributing heads because that may lead to a substantial loss of revenue.2.7 Sector-wiseImportantHeadsWe have earlier seen that there are only 10 heads which are major contributors to the FBT collection. It is also seen that these top heads remain the same for almost all the sectors of the economy. However, it must be noted that though the heads remain the same, their rankings do vary considerably for different sectors of the economy. Table 9 is a summarised representation of the top four heads for each sector of the economy. It is very clear that there is considerable variation among the top four heads and the same is the case for other heads also.It is noted that generally employee welfare, conveyance and sales promotion are the top heads for most of the sectors of econ-omy. However, running and maintenance of car is the largest contributing head for the construction sector and contribution to superannuation fund is the largest contributing head for the insurance sector. Gifts being the eighth ranking head (overall) is among the top four heads for as many as five sectors of the economy. What else can we infer from this analysis?3 ConcludingRemarksOnly three years have passed since the introduction of the FBT in India. The analysis of the collection pattern has given some interesting and important insights. There is much variability in the collection from different sectors of the economy and from different heads of the FBT. Though only around half of the heads of expenses forming the base of theFBT are significant, contrib-uting as much as 90 per cent of collection, it should not lead us to conclude that the least contributing heads should be removed from theFBT base. Significantly, the important FBT heads are the same for almost all the sectors of the economy. Further analysis shows that these highly contributing heads are those with lower valuation bases.TheFBT has been quite a controversial tax since its introduction. It has been criti-cised on many grounds – on the method of its valuation, deeming provisions – all lead-ing to increased compliance costs for tax-payers, on its absurd logic of taxing ex-pense, etc. On the contrary, the govern-ment has argued that there is no additional burden in terms of cost of compliance, the deeming provisions have been introduced to make it simple and for making its collec-tion and administration efficient. It has been suggested that this tax should be replaced by a “tax-equivalent” surcharge on corporate income tax. If done so, it would translate into a flat rate sur-charge of around 4 per cent on corporate tax. However, as we have seen previously, there is wide variability in collection from different sectors of the economy as well as from different heads of expenses. In such a situation, any flat surcharge would not be able to take these intrinsic differences into account. In any case, it should be noted that there is a huge scope for further deliberation, research and empirical analysis ofFBT collection data through the involvement of all stakeholders to gain valuable insight into the issue. It would help in informed discussion, reform of theFBT regime and overall improvement of tax policy formulation and taxation structure of our economy.Notes 1 It may be noted that return of income tax orFBT is due in the next financial year. Thus, for the financial year 2005-06 (called the previous year in income tax terminology), the return of tax was due and filed in the financial year 2006-07 (called assessment year in income tax terminology). 2 For a detailed description ofNIC classification, the web site of the Ministry of Statistics and Programme Implementation, Government of India may be referred to at www.mospi.nic.inTable 9: Top Four Contributing FBT Heads for Each SectorEconomy Sectors Top Four Contributing Heads 1st 2nd 3rd 4thBanking Conveyance Employee welfare Telephone Cont to supfundPetrochemical Employee welfare Conveyance Run, dep of car GiftsInfotech-software Employee welfare Conveyance Hotel, boarding TelephoneInfotech-ITES Employee welfare Hotel, boarding Conveyance Tour, travelInsurance Cont to sup fund Employee welfare Gifts ConveyanceElectrical/electronics manufacturing ConveyanceHotel,boarding SalepromotionEmployeewelfareServices-financial-consultancy Employee welfare Hotel, boarding Telephone ConveyanceTelecom service Employee welfare Run, dep of car Sale promotion ConveyanceEngineering manufacturing Employee welfare Gifts Conveyance Hotel, boardingPharma-drugs-biotech SalePromotion Conference Gifts Tour,travelPower-energy Employee welfare Run, dep of car Conveyance TelephoneDiversified Sale promotion Conveyance Employee welfare Hotel, boardingAutomobile-ancillary Sale promotion Employee welfare Run, dep of car Hotel, boardingMinerals-metals Employee welfare Run,dep of car Conveyance GiftsSteel Conveyance Employee welfare Run, dep of aircraft Run, dep of carFast moving consumer goods Sale promotion Conference Employee welfare Hotel, boardingTransport-hotel-communication-storage Employee welfare Run,dep of car Conference ConveyanceAgro-food-beverage Sale promotion Employee welfare Conveyance Run, dep of carConstruction Run, dep of car Sale promotion Employee welfare Hotel, boardingTrading-retail Employee welfare Conveyance Run, dep of car Hotel, boardingMedia-entertainment Sale promotion Conveyance Employee welfare TelephoneChemical-fertiliser SalepromotionEmployee welfare Run, dep of car ConveyanceOverall Employee welfare Conveyance Run, dep of car TelephoneSource: CBDT.

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