FBT Will Not Reduce Spending On Hospitality & Travel: Industry

Corporations across all industry sectors though unhappy with the introduction of the Fringe Benefit Tax FBT) will continue using hospitality services and travelling on business as usual. Mahesh Tharani reports

The Fringe Benefits Tax (FBT), which has been reassessed by the finance minister P Chidambaram, has not pleased the industry across all sectors. However, the Indian hospitality industry need not worry about loss of business or fall in occupancies as most companies have confirmed that they would not be cancelling or reducing business travel due to the Fringe benefits Tax (FBT).

This opinion was expressed mainly by the large corporations for whom travelling on business or using hospitality services and facilities for conducting business is inevitable. Asserts Daljit Singh, chief executive officer - operations, Fortis Healthcare Ltd, “Any cut-back on travel would adversely impact the conduct of our business.” A similar view was expressed by the silicon valley leader Infosys. Said TV Mohandas Pai, CFO and director (finance and administration) at Infosys, “Nothing is going to change with the introduction of Fringe Benefit Tax. We are not worried about paying the tax.”

Though industry bigwigs have nothing to worry about, it is the small and medium enterprises (SMEs) which will be affected owing to the Fringe Benefit Tax (FBT) levy. Deriving a consensus on the said development, Express Travel & tourism spoke to some of the leading tax consultants who were unanimous in their outlook on the said tax believing that its implementation will certainly affect small, medium enterprises besides the loss making units.

Said a tax consultant of a leading firm in New Delhi, “The small and medium enterprises (SMEs) would be equally liable to pay the tax as larger and profitable companies would. Having said that, this would not reduce their expenses on business travel or spending on entertaining clients.” Agrees Ratnesh Mohan Verma, area director of Hyatt International, “Business is business and a company big or small would not stop entertaining a client or reducing their business travel just because they have to pay extra for the services availed.”

While industry stalwarts across all sectors and hoteliers have called the tax upsetting, they are particularly piqued at the inclusion of travel expenses as a fringe benefit. According to most of them spending on travel is intrinsic to business. In fact, they have come out in full support of either eliminating the tax or reducing the effect further. Besides announcing that the tax is prejudiced against business activities, they have raised questions about defining a fringe benefit.

Quips Rajan Varma, CFO, Dabur India, “The fundamental issue is to determine what is a fringe benefit. If I am travelling on a business trip, how is it a fringe benefit? The new rules give blanket discretionary powers to the assessing officers to determine what a fringe benefit is.” Supporting his view is K R Anil Kumar, chief planning officer, MetLife India Insurance Company Pvt Ltd. He added, “Some of the taxable items under FBT are purely business expenses and there is no fringe benefit to employees. There is a clear need to differentiate business expenses with expenses which may have some fringe benefit to a group of employees. The FBT levy should have been restricted only to such expenses, which clearly provide some benefit to a group of employees.”

In their response, most industry stalwarts have addressed issues about corporate travel, entertainment issues and whether they would ask the hospitality industry to compromise on their tariff besides other issues. These are discussed under the following subheads.

On Reducing Business Travel

The amendments, which had been announced, have given concessions to software, construction and pharmaceutical companies by reducing the taxable value of benefits to five per cent from 20 per cent of the expenses incurred. This means that the effective tax rate has been reduced from six per cent to 1.5 per cent. But other sectors have been ignored thus increasing the tax burden on almost all the companies considering that tour and travel is an integral part of most business activities.

However, companies on the whole have still confirmed that they have no intentions of reducing travel as it will eventually affect business. Dr G S K Velu, managing director, Metropolis Health Services, a chain of Corporate Diagnostics Centres across India says, “We cannot reduce the frequency of travel by our employees. They travel as per requirements and only on work, there is no way we can stop travelling or using hotel accommodation for that matter.”

Fortunately, the software, construction and pharmaceutical companies have it better than most and would be the sectors to think least of reducing business travel. However, the not so fortunate ones viz manufacturers, importers, exporters and retailers though will not reduce business travel but will certainly streamline it.

Ratish Pandey, general manager, Bose Corporation India Pvt Ltd says, “We do not foresee reduction in corporate travel or use of hotels as means of accommodation. However, we will certainly be looking at planning and bringing in more optimisation in our travelling.”

There is one possible outcome of this entire approach toward not reducing travel - rise in the prices of their goods or services. S D Jha, executive director, IDEB constructions says, “Business has to go on as usual. This tax may however, increase the overheads and ultimately higher product cost to the consumer, but we will still not be able to reduce business travel.

Association’s Take On FBT

The Confederation of Indian Industry (CII) feels that the FBT was presumptive in nature and could lead to disputes and litigations. “Ideally, we would have liked to see the proposal to levy FBT withdrawn,” expressed CII president Sunil Kant Munjal.

And while CII has issued statements against the tax, it is the corporate India who has vehemently opposed the inclusion of the tax in the Union Budget 2005-06. N Srinivasan, director general, CII adds, “The tax shouldn’t have been imposed in the first place as it is a tax on expenditure and is presumptive, thus, open to interpretation and disputes.

Conclusion

Concluding the issue about the Fringe Benefits Tax and its effect on the hospitality industry is Shyam Suri, secretary general, Federation of Hotels and Restaurants of India (FHRAI). He says, “This tax is very bad for the industry. After a month of consideration by the government they have still decided to continue with the tax. However, a reduction in sales may not actually occur since there will be other factors like the growth in the industry and the economy that will cover up for the obstacle.”