Give Some, Take Some

'Give some, take some' has been the new motto of the Centre - a stance that has been clearly vindicated through both the recent and last year's Union Budget. Savio Rodrigues takes a look at the new changes on fringe benefit tax and service tax, and its impact on business travel

Picture this (though it might appear to be a screenplay of a beaten-to-death Hindi movie), you've been shot and the person tending to your wounds is the same person who shot you. Unbelievable, don't you think? Well believe it. And if you don't believe me, read through the Union Budget 2006-07 and you will realise the unusual but not unbelievable situation in which the business of corporate travel stands today.

On one hand the Centre, through extensive lobbying for many business houses, reduced the much-dreaded fringe benefit tax (FBT) on tours and travels (including foreign travel) from 20 per cent to five per cent. On the other hand it levies a 12 per cent service tax on transport of passengers (other than economy class) embarking on an international journey by air and transport of persons by cruise ship.

The Give

Sowing Seeds Of FBT

Post the Union Budget 2005-06, the corporate travel circles in the country were buzzing with doomsday predictions on account of the levy of 20 per cent tax on fringe benefits. More importantly, many corporates, including travel and hospitality companies, were peeved that travel and hospitality came under the scanner of FBT; according to most of them spending on travel and hospitality is intrinsic to business.

According to Rajan Varma, CFO of Dabur India, "The fundamental issue is to determine what a fringe benefit is. 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, who states, "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 those that 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."

FBT: As It Stands Today

A year later, records show that corporate travel in the country has in no way been affected by the dreaded FBT as companies were not willing to curtail expenditure at the cost of risking business opportunities. While business travel did not witness a downslide, the measure adopted to tide over this much talked about crisis was the rationalisation of business travel expenses.

Asserts Daljit Singh, CEO (Operations) of Fortis Healthcare Ltd, "Any cut-back on travel would adversely impact our business." T V Mohandas Pai, CFO and director (Finance & Administration) at Infosys expresses a similar view, "Nothing is going to change with the introduction of FBT. We are not worried about paying the tax."

Ratish Pandey, GM of Bose Corporation India Pvt Ltd says, "We did not reduce corporate travel or use of hotels as means of accommodation. However, we certainly did look at optimising our travelling."

Corporates and travel companies alike have appreciated the step taken by the finance minister P Chidambaram on reduction of FBT for tour and travel. According to Om Prakash, director of Orbit Tours & Trade Fairs, the cut in FBT is a welcome move and will give a boost to business from the corporate sector. "Incentive travel has increased manifold all over the world and India is no exception. This reduction in FBT will help further boost Meetings, Incentives, Conventions and Exhibitions (MICE) travel, especially the incentive segment. We did not face a drastic drop in business with the introduction of 20 per cent FBT on travel and hotel stay last year as most companies were studying the ramifications and trying to devise means to overcome this new hurdle. However, we did witness a slight slump in business from smaller companies."

Arup Sen, executive director at Cox & Kings, is of the opinion that the reduction is a positive move. "Last year the government introduced FBT and it was the first time such a tax was introduced. They have learnt from it and have reduced the taxation. I don't think the FBT in case of value benefit in the form of tours and travel and hospitality had an impact on business travel and conferences. Corporates did not curb travel just to save FBT. The reduction will now improve the bottomline of corporates," informed Sen.

The Take

The introduction of service tax, which has been increased from 10 per cent to 12 per cent on international first and business class air travel and travel on cruise liners is viewed as a negative impact on business from the corporate sector. But all in all, on the face of it, the budget this year looks good for the travel industry, said Prakash.

The imposition of 12 per cent service tax on international business and first class air travel is likely to see many executive class passengers opt for the economy category - especially in short-haul sectors. Business and first class international fares are generally three to five times higher than economy fares. With airlines not willing to absorb the tax, it will further widen the fare difference between business and economy class travellers. However, it is still unclear whether the tax will be imposed on full list fares or discounted ones that airlines offer to corporate travellers.

Industry experts say this may even force airlines to change the seat-mix between business and economy seats in international flights. A third of all seats in a flight are allocated to business and first class categories.

The government has clarified that it is the airlines' liability to pay service tax and it does not pertain to transit passengers. While the burden will be borne by a passenger, airlines have to collect the levy, account for it and pass it on to the government. According to Praveen Gandhi, CEO (India) of Carlson Wagonlit Travel, "The service tax on business travel will force many corporates to travel via economy class. And it will certainly be bad for corporate travel companies that use the facilities of airline and cruises."

Conclusion

Will the new budget put a spoke in the growing corporate travel market? The answer is - very unlikely. While it may seem impossible to escape the claws of the taxman on account of the new revisions that the finance minister has incorporated, large corporates will certainly not reduce their business travel or hotel stays; they will find alternate means to overcome this. Like they say, where there is a will there is a way.It is however the Small and Medium Enterprises that would have to take stock of their expenses more carefully.