28 March 2009
1. Fringe Benefit Tax introduced by inserting Chapter XII-H in the Income-tax Act by the Finance Act, 2005 is one of the most controversial pieces of legislation in recent times. Instead of simplifying our tax laws, this tax will create more complications and invite unending litigation. The most difficult and the most controversial part of the legislation relates to the computation of Fringe Benefits. This computation is the basis for levy of Fringe Benefit Tax (FBT).
2. To justify a separate tax on Fringe Benefits, the Finance Minister has stated in para 160 of the Budget Speech on 28-2-2005 as under :
"160 I have looked into the present system of taxing perquisites and I have found that many perquisites are disguised as fringe benefits, and escape tax. Neither the employer nor the employee pays any tax on these benefits which are certainly of considerable material value. At present, where the benefits are fully attributable to the employee they are taxed in the hands of the employee; that position will continue. In addition, I now propose that where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees, they shall be taxed in the hands of the employer. However, transport services for workers and staff and canteen services in an office or factory will be outside the tax net. The tax is not a new tax, although I am obliged to call it by a new name, namely, Fringe Benefits Tax. The rate will be 30 per cent on an appropriately defined base."
3. While giving his reply to the debate in the Lok Sabha on 2-5-2005, the Finance Minister has clarified the amendments made by him in the original proposal for FBT as under : "Fringe benefit tax is a presumptive tax. As I said in my Budget Speech, there are a large number of allowances, perquisites which are given, which go untaxed. Now, the fringe benefit is taxed in many countries. It was taxed in India until 1997 through what is called the ‘disallowance route’. But the disallowance route vested a large amount of discretion in the Income-tax Officer. Therefore, in 1997, I amended that section to close that discretion and said, : "We will not bother to tax this amount". But what we find is that the effective tax rate of the corporate sector continues to be very low. The effective tax rate of corporate sector when the tax rate was 35 per cent is only about 20 per cent. Therefore, by the presumptive tax method what we are trying to do is to tax that part which is clearly a perquisite, clearly a benefit but which is going untaxed both in the hands of the employer and the employee. After the Budget was presented, we have called the three Apex organizations CII, ASSOCHAM and FICCI. We have brought in the Institute of Chartered Accountants. They have gone into international practices. They have examined everything. I have received a report from my officers who consulted them extensively over several days and we have now modified them. We have exempted some of the benefits which we thought were fringe benefits, but which they thought were legitimate business expenditure. We have reduced the base in all but four cases to 20 per cent. This is a presumptive tax. A presumptive tax is necessary because you have to avoid inventive accounting practices. People can shift the classification of expenditure from one head of account to another. So, if we have presumptive tax and have an exhaustive list of accounting heads and have a uniform base, the scope for evasion is very very limited. What we are doing is eliminating the entire discretion. What we are now asking him is to file a tax audit certificate saying according to his auditor these are the expenditures under the various heads included in the new chapter, that the whole chapter be replaced in the amendment. If the tax auditor certifies these are the heads, the officer has no discretion. The Income Tax Officer has to accept that tax audit certificate unless it turns out to be a patently false certificate. We will accept the certificate of the auditor. The Institute of Chartered Accountants is laying out is guidelines under the accounting standards and this will be taken as the base. A 20 per cent rate will be applied and on that base a 30 per cent tax will be applied. What it adds to the corporate tax rate, assuming that every company gives every one of the benefits – I am now taking extreme case – listed in this chapter to every employee, it will increase the effective tax rate of that company between 1 and 1.5 per cent. So, the effective rate will move up from about 20 or 21 today to about 21 or 22 when the scheduled rate still is 30." (144 Taxman P. 122 (St) )
4. The Finance Minister while replying to the debate in Rajya Sabha on 5-5-2005 has justified the above tax in the following words. "Now what we have done is that we have taken the alternative route, which is prevalent in many countries, namely, instead of going through the disallowance route, we are going though the route of identifying expenditure, which are clearly fringe benefits, Yes, there is natural apprehension how will this system work, Well, I am happy that I have an opportunity to explain this, the system will work in a very simple way. All that we are doing now is — I am sure chartered accountants in this House may appreciate it – that wherever there is 44 AB requirement of tax audit certificate, in that prescribed form along with all other existing items, I am simply including the 17 or 18 heads of fringe benefits to be certified by the tax auditor. Once that certificate is produced, the assessing officer has no discretion but to accept that tax audit certificate as the fringe benefit expenditure of that company. It is such a very simple form, a form that already exists in which we are including these items to be audited and to be supported by a tax audit certificate. In the return, we are adding a schedule to the existing return in which they will list the heads of expenditure and show what expenditure was incurred. Everybody who is familiar with accounting knows all these expenditures have a separate ledger page and all these expenditures are debited to one or other expenditure head which reflected in the ledger. All that you have to do is reproduce the entries in the ledger, reproduce the total in the ledger and list it under the heads of expenditure. This has been done after widest consultations with industry, Chambers of Commerce, auditors and tax practitioners. It is a very simple system. What this does, as opposed to the disallowance route of section 37, is, under the disallowance route there was a vast amount of discretion vested in the tax assessment officer, under this FBT route, that discretion is taken away. Now, you can argue philosophically, is it right to tax fringe benefits? That is a philosophical question, I believe that it is right to tax fringe benefits. Today, perquisites are taxed in the hands of the employee. What we are saying is, the principle is cost to the company. ………… Fringe benefits disguise the real cost to the company and don’t tell the shareholder what an employee is costing to the company. Cost to company is the rule today in accounting. Fringe benefits when accounted for is transparent way of finding out what is costs a company for having employees, for having workers. We have excluded a number of benefits which accrue to us. For example, canteen expenditure has been excluded, transport and travelling has been excluded. Even under the fringe benefit, as amended by Lok Sabha, we have taken care to exclude what I realized would be legitimate business expenditure and perhaps not amendable to the categorization, fringe benefit. What has been included is fringe benefit. We have lowered the base rate sharply to 20 percent in most cases, except four cases where it is 50 percent and for special sectors like pharmaceuticals and software and travel agencies, we have lowered the base even further to 5 percent. This according to me, will add approximately 1 to 1.5 percent of the effective tax rate. A question was asked, ‘Is it not better to raise a corporate tax rate rather than go through the fringe benefit route? ‘Well, it is superficially attractive argument. But, then, you are penalizing a company which pays all benefits as salary and you are not penalizing a company which is paying part of the benefit as fringe benefits. If you have a higher corporate rate, then, the company which pays all as salary and does not disguise it as various fringe benefits is penalized for the higher corporate rate. Today, the corporate rate has been lowered but anyone who is paying fringe benefits, perquisites disguised as fringe benefits, he would have to pay effectively, if he pays all the fringe benefits to his employees, our calculation show that effective corporate rate may go up between 1 and 1.5 per cent. The effective corporate rate in the country for non-banking companies is only 20 per cent. The scheduled rate is 35. The effective rate is only 20 per cent. Therefore, one way to move the effective rate towards a schedule rate – it cannot be done in one go — is to capture expenditure which is otherwise really a perquisite or a fringe benefit, which has escaped taxation, capture it and bring it back to the tax net so that companies which give away a large amount of money by way of fringe benefits would have to effectively pay one or one and a half per cent more. Now, I have also been watching television channels on the debate. Yes, of course, opinion is divided. But I can also quote half a dozen people. Among them is Mr. Mohandas Pai of Infosys who says, it does not make any difference to us, we are quite happy to pay FBT. I am sure I can also recall a number of others who said, ‘No, no, we are unhappy about it." But as I said, it is not possible to tax and please. All I can say is, there is rationale for this taxation, there is a rationale justification for this tax and the administration of the tax is so simple. The form and the tax audit certificate makes it so simple. I assure the House, nobody will be harassed in their IT. Nobody will be put to any difficulty. If any difficulty is brought to my notice, we will simplify it even further." (145 Taxman P. 29 (St) )
Fringe Benefits 5. The concept of Fringe Benefit being treated as perquisite in the hands of the employees was introduced in the Income tax Act by the Finance Act, 2001, w.e.f. 1-4-2002 by an amendment of section 17(2). Rule 3(7) of the Income tax Rules defining Fringe Benefits and Valuation of fringe benefits and amenities was introduced from 1-4-2002.
From the above speeches of the Finance Minister in the Parliament, the objective behind the new levy of tax is very clear. However, the Government has amended Rule 3 of Income tax Rules on 28th February, effective from 1-4-2005. The effect of this amendment is that benefits enjoyed by employees such as use of Motor car, conveyance, travelling expenses for personal purposes, free meals, gifts, club facilities etc. which were clearly attributable to each employee have been removed from the definition of perquisites. Expenses relating to these benefits which were earlier taxable as perquisite in the hands of employee will now be taxable as fringe benefits in the hands of employer. 6. The Finance Act, 2005 has inserted a new chapter XII-H in the Income-tax Act containing sections 115W to 115WL. Section 115WA provides that the FBT @ 30% of Fringe Benefits provided or deemed to have been provided by an employer to his employees during the previous year will be payable effective from A.Y. 2006-07. FBT is an additional income tax which is payable by the employer even if he has no taxable income or he has suffered loss. Although the rate fixed in this section is 30%, the effective rate will work out to 33.66% (Including surcharge of 10% and education cess 2%).
7. This tax is payable on expenditure incurred under 18 heads of expenses by a company, partnership firm, association of persons, body of individuals, local authority and juridical person having employees in their organizations. It is not necessary that such person should be an assessee under the Income-tax Act. Even if a person has made a loss, it will have to pay this tax as FBT has no relationship with the tax payable under the Income-tax Act. Although the Finance Bill provided for levy of this tax on individuals, HUF and charitable trusts, these persons are now excluded from this levy. There is no exemption limit fixed for this levy. Therefore, even if the expenditure is nominal under any of the 18 heads of expenses, tax at 33.66% will be payable. This tax is payable in respect of expenditure incurred on or after 1-4-2005. It may be noted that FBT is not allowable as deduction in computing total income under the Income-tax Act. 8. For levy of this tax, Fringe Benefit is defined as any consideration for employment by way of (a) any privilege, service, facility or amenity, directly or indirectly, provided by an employer, whether by way of reimbursement or otherwise, to his employees or former employees, (b) any free or concessional ticket provided by the employer for private journeys of his employees or their family members, and (c) any contribution by employer to an approved superannuation fund for employees. It is provided that in respect of any free or concessional tickets for private journeys of employees and their family members and contribution to superannuation fund, the entire expenditure will be treated as fringe benefit. Besides the above, it is provided that Fringe Benefits shall be deemed to have been provided by the employer to his employees, if the employer has, in the course of his business or profession (including any activity whether or not it is carried on with the object of deriving income, profits or gains), incurred expenditure under 16 heads of expenses listed in section 115WB (2). In respect of these 16 items only certain percentage of expenses will be considered as Fringe Benefit. Computation of Fringe Benefits 9. Since the provision for FBT is a part of the Income-tax Act, and section 115WL provides that all other provisions of Income tax Act will apply in relation to Fringe Benefits, it can be concluded that the amount of expenditure on Fringe Benefits will have to be computed keeping in view the expenditure allowable in the computation of total income. This is because the employer will pay tax on the amount of expenditure which is disallowed in the computation of total income. If the said amount is again considered as fringe benefit, there will be double taxation on the same amount. 10. It may be noted that section 115WB (1) defines "fringe benefit" as "consideration for employment" provided by way of – any privilege, service, facility or amenity – provided by an employer – to his employees". Further, section 115WB(2) gives a list of expenses under different heads which shall be deemed to be "Fringe Benefit" provided by the employer to his employees. It is therefore evident from the wording of the section that the above tax is payable only in respect of above 18 items of expenses which are incurred to give benefit to employees and their family members. Considering the nature of the expenses under various heads it will be difficult to identify expenditure incurred for the benefit of employees. The person liable to pay this tax will have to maintain separate accounts under each of the above 18 heads with reference to expenses incurred by or for the benefit of the employees (including family members of employees) and other expenses for normal business purposes. The specified percentage of only expenditure incurred by or for the benefit of employees can be considered as Fringe Benefit. On this basis, expenses incurred by a partner, of a partnership firm for motor car, conveyance, conference, travelling etc. will not be included in the above computation because a partner is not an employee. 11. As stated above, the expenditure which is allowable as deduction for the purposes of computation of income under the Income-tax Act is to be considered for computing Fringe Benefits. Again section 115WB(2) states that such expenditure should have been incurred by the employer in the course of his business or profession (including any activity whether or not such activity is carried on with the object of deriving income, profits or gains). Therefore, expenditure incurred by the employer for earning house property income, capital gains, income from other sources etc. will not be considered for the purpose of FBT. In view of this position, the following propositions should be kept in mind while computing expenditure in the nature of Fringe Benefits. i. Separate accounts will have to be maintained for expenses under 18 items for employees and expenses for others in the books so that computation of Fringe Benefits becomes easier. A view can be taken that the levy of FBT is on specified percentage (say 20% or 50%) of expenses for employees. This is because 20% of such expenses is deemed to be in the nature of "Fringe Benefits" and the balance is for the purpose of business.
ii. If any such expenditure is liable to be included in the income of employee in the form of salary, perquisite or otherwise, such expenditure will not form part of the expenditure under 18 items. This is irrespective of the fact that the employee has no taxable income or that full or partial exemption is granted under section 10 or 17 or under the Rules.
iii. If any amount is recovered from the employee towards such expenditure, the same should be reduced while computing Fringe Benefits liable to FBT.
iv. If the assessee has incurred any revenue expenditure under 18 specified heads, before commencement of business, and the same is capitalized, such expenditure will not be liable to FBT.
v. If in the above case the assessee is already carrying on a business and such expenditure is incurred for an expansion project and capitalized, such expenditure will form part of computation of Fringe Benefits even if it is capitalized.
vi. If any expenditure under 18 heads is not allowable as deduction in the computation of income of the employer under sections 40(a), 40A, 43B or other sections or rules the same should be excluded in the computation of Fringe Benefits.
vii. If the assessee is liable to pay tax on presumptive basis e.g. Small Civil Contractor (44 AD), Small Transport Operator (44 AE), Small Retail Merchant (44 AF), Foreign Shipping Company (44 B), Non-Resident carrying on business specified in sections 44 BB, 44 BBA, 44 BBB etc., the provisions for FBT will apply and such assessees will have to give details of expenses under 18 heads.
viii. Even if the employee is a non-resident, expenditure under 18 heads relating to such employee will be liable to FBT.
ix. Expenditure under 18 items relating to partner of a firm or non-executive director will not be liable to FBT since the partner/non-executive director is not an employee.
x. Salary and allowances given to an employee engaged to carry out the activities covered by 18 items listed in section 115WB will be taxable in the hands of the concerned employee. Therefore, expenditure on such salary or allowances will not enter the computation of Fringe Benefits. In other words, salaries and allowances of employees providing entertainment, hospitality, food and beverages, rendering services for sales promotion and staff in canteen, staff for employee’s welfare, for running motor cars and aircraft, staff in guest house etc. will not form part of Fringe Benefits.
xi. Expenditure on ESOP is not to be considered as Fringe Benefit. Similarly, expenditure for recruitment of staff, keyman insurance, accident insurance, Mediclaim insurance etc. will not be considered for the above computation. Expenditure on computer/Laptop given to the employee will not be considered for the above computation.
xii. Depreciation on motor cars/aircrafts should be computed as provided under the Income-tax Act.
Items of expenses 12. As stated earlier, Section 115WB gives list of 18 items of expenses out of which 2 items are such that the entire expenses are to be treated as Fringe Benefits and 16 items are such that only the specified percentage (i.e., 20% or 50%) of these expenses will be considered as Fringe Benefits for the levy of FBT. Some of the items are such that they relate to individual or collective benefit enjoyed by the employees. Other items are such that they represent business or professional expenses and no benefit to employees is involved. Since the concept of FBT is to levy tax on collective benefit enjoyed by employees, we will have to await clarification from CBDT as to how computation of such expenses should be made for the purposes of FBT. 18 items of expenses stated in section 115WB are discussed below.
13. Free or concessional ticket provided by employer for private journeys of employees or his family members (100%)
It is evident from the wording of section 115WB(1)(b) that this clause refers to an assessee who is engaged in the business of transport of passengers by road, air or water. This view is further fortified by the valuation provision in section 115WC(1)(a) which states that the cost at which the above ticket for journey is provided by the employer to the general public will be the basis for computing Fringe Benefit to the employee who is given such a free ticket. If any amount is recovered from the employee for a concessional ticket, it will be deducted from the above amount.
14. Employer’s contribution to approved Superannuation Fund (100%) It may be noted that if such fund is not approved by the Chief CIT under Rules in Part B of Fourth Schedule, the employer’s contribution will not attract FBT. This is because the contribution to unapproved fund is not allowable as deduction u/s 36(1)(iv) of the Income-tax Act. Again, if the contribution is made by the employee to such approved fund, the same will not be liable to FBT.
15. Entertainment (20%) i. This term is not defined in the Income-tax Act. However, in the case of CIT vs. Patel Brothers & Co. Ltd. 215 ITR 165 (SC), the Supreme Court has observed that ordinarily, "Entertainment" connects something which may be beneficial for the mental or physical well being but is not essential or indispensable for human existence. A bare necessity, like ordinary meal, is essential or indispensable and, therefore, is not "entertainment". If such a bare necessity is offered by the assessee, it is hospitality but not entertainment. On this basis expenditure on tea, coffee, meals, beverages etc. will not fall under this item but will fall under the next item discussed in 4.5 below.
ii. In the case of Bhanwarlal Manakchand vs. CIT 156 ITR 166 (Raj), Rajasthan High Court has held that amusement to client will be treated as entertainment.
iii. Since the expenditure relating to employees is only liable to FBT, it will be advisable to maintain separate accounts viz. (a) Entertainment to employees A/c and (b) Entertainment to others A/c. in the books. It can be concluded that the intention is to levy FBT on the specified percentage (say 20%) of expenses for employees (i.e. 20% of Entertainment to Employees A/c.). This is because 20% of such expenses will be deemed to be in the nature of ‘Fringe Benefits’ and the balance will be for the purpose of business.
iv. Entertainment allowance given to employees if debited to entertainment to employees A/c. should be deducted because it is taxable as part of salary income of the employee. This cannot be considered as Fringe Benefit and no FBT is payable on this expenditure.
16. Hospitality (20%) i. Provision of hospitality of every kind by the employer to any person, by providing food or beverages or in any other manner, whether or not there is any express or implied contract or custom or usage of trade will be deemed to be a Fringe Benefit. 20% of such expenditure is liable to FBT. However, this does not include – – expenditure on food or beverage provided to the employees in office or factory.– Expenditure on or payment through vouchers which are not transferable and usable only at eating joints or outlets. ii. From this item it will be seen that expenditure on food, beverage etc. provided to employees at office or factory or through non-transferable vouchers at eating joints or outlets will not be considered as Fringe Benefits. In other words, expenditure on food, beverages etc. provided to others will be treated as Fringe Benefit. This clearly goes against the basic principle enunciated by the Finance Minister that FBT is tax on individual or collective benefit to employees.
iii. Keeping in view the legislative intent, the words, "to any person" in this clause can be treated as referring to a person who is closely connected with the employees. Therefore, a view can be taken that such expenditure for the family members of the employees is to be included in the computation of Fringe Benefits. Further, food, beverages etc. provided to employees and their family members outside office or factory (e.g., at a hotel) will also be included in the above computation.
iv. As discussed earlier, expenditure on tea, coffee, snacks etc. in the office or factory cannot fall under the clause dealing with ‘Entertainment’. This will fall under the clause dealing with "Hospitality". Since exemption is given for such expenditure relating to employees, the same will not form part of computation of Fringe Benefits. Therefore, separate account for such expenses will have to be maintained. The expenditure of canteen at office or factory can be claimed to be exempt from FBT.
v. It may be noted that expenditure on hospitality provided to employees by an employer engaged in the business of ‘Hotel’ will be liable to FBT with reference to only 5% of such expenditure instead of 20%. Since employees will be provided food, beverages etc. in the hotel itself, which is the place where they are working, such expenditure will not form part of Fringe Benefits. Therefore, expenditure on food, beverages etc. provided to family members of employees at the hotel will be covered by this item. If such expenses are incurred for employees or their family members outside the hotel, the same will be covered by this item.
17. Conference expenses (20%) i. Under this item 20% of conference expense, other than fees for participation by employees in any conference, will be considered as Fringe Benefit. It is also provided that any expenditure for conveyance, tour and travel (including foreign travel), on hotel or boarding and lodging in connection with the conference will be deemed to be conference expenses.
ii. Since FBT is on Fringe Benefits given to employees, this item will have to be considered as expenditure on conferences in which employees have participated. If the employee attends a conference with family members, such expenses on travel, hotel etc. will have to be included. Therefore, separate account for such expenses will have to be maintained. Participation fees of employees for such conferences will be excluded from the above expenditure. If separate participation fees are paid for family members of any employee, the same will be included under this item.
iii. It may be noted that expenditure for attending conferences in foreign countries will also be included in the above computation.
iv. The term "Conference" is not defined. It can be concluded that a conference will mean a formal meeting for discussion or debate. It will include a seminar, symposium etc. It appears that a general meeting of members of a company will not be treated as a conference.
v. It may be noted that in the case of an employer engaged in the business of (a) construction, (b) manufacture or production of pharmaceuticals or (c) manufacture of computer software only 5% of expenditure on conveyance, tour and travel (including foreign travel) is considered as Fringe Benefit. Similarly in the case of employer engaged in business at (b) or (c) only 5% of expenditure on hotel, boarding and lodging is considered as Fringe Benefit. However, in view of Explanation to this clause, expenditure on conveyance, tour, travel, hotel boarding, lodging etc. incurred by the employer engaged in the business (a), (b) or (c) for the purpose of a conference, the percentage to be applied will be 20% and not 5%.
vi. 18. Sales promotion, including publicity (20%) i. This item deals with expenditure on sales promotion (including publicity). However, the following expenditure is excluded. (a) Advertisement through any print media, journal, catalogues, price list, electronic media, transport systems etc.(b) Holding or participation in any press conference, business convention, fair or exhibition.(c) Sponsorship of any sports event or any event organized by any Government Agency, trade associations or body.(d) Publication of any notice required to be published by any law or any order of court or tribunal.(e) Advertisement by way of signs, paintings, banners, hoardings, bill boards etc.(f) Payment to any advertising agency for the above advertisement. ii. It is now well settled that "Sales Promotion" expenditure will not include "Sales expenses". Therefore, commission or incentive to selling agents will not be considered as sales promotion expense. Similarly, discounts and commission allowed to customers cannot be considered as sales promotion. (Refer CIT vs. Santosh Agencies - 210 ITR 79 (Cal), CIT vs. Tuticorin Alkali Chemicals & Fertilizers Ltd. – 261 ITR 80 (Mad), CIT vs. The Statesman Ltd. 198 ITR-582(Cal) ).
iii. It may be noted that cost of samples given free to customers has been held to be sales promotion expenses (Smith Kline & French (India) Ltd. vs. CIT - 219 ITR 581(SC).
iv. For the purpose of this item also separate accounts will have to be maintained for expenditure on sales promotion which gives any benefit to employees or their family members and other expenses. This is because the expenditure which gives benefit to employees or their family members is liable to FBT.
19. Employee’s welfare expenses (20%) i. Employee’s welfare is a very wide term. It is, however, explained that expenditure incurred to fulfil any statutory obligation or mitigate occupational hazards or provide first aid facilities in the hospital or dispensary run by the employer will not be considered as expenditure on Employee’s welfare. Therefore, following expenses will be outside the scope of this item. (a) Contribution to recognised provident fund, gratuity fund, ESI etc. (b) Statutory payment of compensation in case of accident while the employee is on duty.(c) Expenditure on uniform, gloves etc. provided to employees who are required to use them while on duty.(d) Expenditure on maintenance of creche and other amenities for women employees as required by the local laws.(e) Expenditure on medical facilities which are required to be provided by local laws.(f) Expenditure on sports facilities required to be maintained by local laws. ii. here are several other items of expense which may have been debited to Employee’s Welfare A/c. These items can be excluded from the computation of expenditure under this head. This is because they are covered under other items stated in section 115 WB. These are as under. a) Entertainment of Employees.b) Provision of food, beverages etc. in office or factory.This is exempt u/s 115 WB (2) (B).c) Festival celebrations.d) Use of health club and similar facilities.e) Use of any club facilities.f) Giftsg) Scholarships. iii. Expenditure on medical treatment will be included in this item. However, as the same is considered as perquisite u/s 17(2), such expenditure will have to be excluded from the computation of expenditure under this item. This is irrespective of the fact whether it is taxable u/s 17(2) or not.
iv. The employer will have to keep separate accounts or particulars in respect of each of the above items so that the computation of Fringe Benefit under this item can be properly made.
20. 4.9 Conveyance, tour and travel (20%) i. Under this item 20% of conveyance, tour and travel expenses, including foreign travel expenses, will be deemed to be Fringe Benefits liable to FBT. As stated earlier, this expenditure relating to employees or their family members can only be considered for computation of Fringe Benefits. Therefore, the employer will have to keep separate account for these expenses. It may be noted that expenditure on use of hotel, boarding or lodging during travel will not be covered under this item. It will fall under the next item.
ii. Since expenditure relating to employees is to be considered under this item, expenditure incurred by partners of a firm, auditors, non-executive directors, consultants, etc. who are not employees will be excluded from the above computation.
iii. It may be noted under section 10(14) read with Rule 2BB certain conveyance and travel expenses of employees and their family members are exempt from tax. Such expenses will have to be excluded from the above computation.
iv. Similarly, section 10(5) read with Rule 2B grants exemption in respect of travel expenses for LTA. Therefore, expenditure on LTA to employees (including their family members) will be excluded from the above computation.
v. It is provided in section 115 WC that in respect of employees who are engaged in the business of (a) construction, (b) manufacture or production of pharmaceuticals and (c) manufacture or production of software, only 5% of the above expenditure will be considered as Fringe Benefits for FBT purposes. If the employer is also engaged in any other business besides any one of the above, it will be possible to claim the benefit of lower percentage if separate details of expenses for any of the above businesses are available. It is also possible to take the view that if the principal business is any of the above three businesses and other business activities are subsidiary, incidental, minor or feeding activity, benefit of lower percentage can be claimed on the entire expenditure under this item. (Regional Provident Fund Commissioner, Bombay vs. Shree Medical Krishna Metal Mfg. Co. AIR 1962 SC 1536).
21. Hotel facilities (20%) i. Under this item 20% of expenditure on use of hotel, boarding and lodging facilities will be considered as Fringe Benefit. Here also the expenditure should relate to employees or their family members. Therefore, expenditure incurred by partners of a firm, auditors, non-executive directors, consultants etc. who are not employees will have to be excluded.
ii. In the case of employer engaged in the business of manufacture or production of pharmaceuticals or computer software the percentage applicable will be 5% instead of 20%.
iii. It may be noted that an employer engaged in the business of construction only 5% of expenditure on conveyance, travel or tour will be considered as Fringe Benefit. However, as regards expenditure on hotel, boarding or lodging, while on tour or travel, 20% of expenditure will be considered as Fringe Benefit.
iv. As stated earlier, the employer will have to keep separate accounts for the above expenses for employees and for others.
22. Motor car expenses (20%) i. Expenditure on repairs, running (including fuel), and maintenance of motor cars as well as depreciation thereon will be considered as Fringe Benefit to the extent of 20% of such expenses. It may be noted that the term "motor car" will not include bus, coach, delivery van, two or three wheeler vehicles, trucks, etc. It will, however, include Jeep in view of decisions in the cases of E.I.D. Parry (India) Ltd. vs. CIT 243 ITR 116(Mad), Balanoor Tea & Rubber Co. Ltd. vs. State of Kerala 207 ITR 501(Ker).
ii. As stated earlier, this item will relate to expenditure on use of employer’s motor car by the employees or their family members. Even if a motor car is given for the exclusive use to an employee or his family members the same will be covered by this item. This is because, after amendment of Rule 3, use of employer’s motor car by the employee is not to be treated as perquisite in the hands of the employee. Therefore, separate account for expenses on motor car used by employees, whether exclusively or collectively, will have to be kept for this computation.
iii. In the computation of the expenditure under this item, depreciation on motor car is to be considered. This depreciation will have to be worked out as provided under the Income-tax Act.
iv. As regards one time road tax paid to the Government or local authority it is possible to take the view that this is not covered by the above item because it is not repair, running or maintenance expenses. However, yearly taxes will have to be considered. Similarly insurance of motor car will have to be included in the above computation as the same is part of running expenditure.
v. It may be noted that in the case of an employer engaged in the carriage of passengers/goods by motor car the percentage to be applied for computing Fringe Benefit is 5% of the above expenditure and not 20%.
23. Air-craft expenses (20%) i. Expenditure on repairs, running (including fuel) and maintenance of aircraft as well as depreciation thereon will be considered as Fringe Benefit to the extent of 20% of such expenses. For this purpose, an aircraft will include a helicopter, balloon, glider, and other flying machines.
ii. Depreciation on aircraft will have to be computed as provided under the Income tax Act.
iii. It may be noted that this item does not apply to an employer engaged in the business of carriage of passengers or goods by aircraft. Therefore, this item will have to be considered in the context of an assessee who is engaged in the business of manufacture or production of goods or in trading and who maintains an aircraft/helicopter for the purpose of its business.
iv. As stated earlier, this item will apply to the use of aircraft/helicopter by the employees or their family members. Therefore, if aircraft is used by persons who are not employees of the assessee the above expenditure, to this extent will have to be excluded for the computation. It will, therefore, be necessary to maintain separate account for such expenses.
24. Telephone expenses (20%) i. 20% of the expenditure on use of telephone (including mobile phone) other than expenditure on leased telephone lines will be considered as Fringe Benefit. From the wording of this item it is evident that the cost of the telephone instrument and cost of installation will not be covered by this item.
ii. Expenditure on leased circuit lines will not form part of the above expenditure.
iii. As stated earlier, this item also will have to be connected to the use of telephone/mobile by the employees. Therefore, telephone expenses installed at the residence of employees will be covered. Similarly, use of mobile phone by the employees will be covered by this item.
25. Guest house expenses (20%) i. 20% of the expenditure on maintenance of any accommodation in the nature of guest house will be considered as Fringe Benefit. If the accommodation is used for training purposes, expenditure will not be considered under the above item.
ii. It may be noted that the word used in this item is "maintenance" of any guest house. The word "repair" is not used. Therefore, it will be possible to take the view that any expenditure on repairing the guest house will not be included under the above item. Similarly, there is no mention about depreciation and therefore depreciation of the Guest House building, furniture, fixtures and equipments etc. will not be required to be considered for the above computation. In other words, only day-to-day maintenance of the guest house will be included.
iii. As stated earlier, this item will also have to be considered with reference to the use of the guest house by the employees. Therefore, a separate account will have to be maintained for the expenditure relating to the use of the guest house by the employees.
iv. Maintenance of guest house will include expenditure such as rent, electricity, water etc. Therefore, this expenditure will be considered under the above computation. Further, as stated earlier, the expenditure relating to guests, other than employees, will not be included for this computation. However, if the guest house is situated in the factory premises, the expenditure on food, beverages and refreshments to employees will be exempted as stated in para 4.5 above. In respect of expenditure on food, beverages etc. provided to others at the guest house, the same will not be included in the above computation.
26. Festival expenses (50%) i. 50% of the expenditure on festival celebrations will be considered as Fringe Benefit. The expression "festival celebration" has not been defined. Again, in the context in which the FBT is to be levied, such expenditure should be in relation to celebrations where employees participate.
ii. A view can be taken that the expenditure on celebrations relating to some religious events such as Janmashtami, Ganapati. New Year etc. will be covered. However, if there is a celebration on a national day such as Independence Day or Republic Day such expenditure will not be considered as a festival celebration. Therefore, separate accounts will have to be maintained for expenditure on participation by employees and their family members.
27. Health club expenses (50%) i. 50% of the expenditure on use of health club and similar facilities will be considered as Fringe Benefit. In the Finance Bill, 2005 this item included "sports" facilities. However, in the Finance Act as enacted the word "Sports" has been omitted. Therefore, it can be concluded that expenditure on sports facilities will not be covered under this item.
ii. As stated earlier, expenditure on use of health club and similar facilities by employees and their family members will only be covered under this item. Therefore, separate account for the same will have to be maintained.
28. Club expenses (50%) i. 50% of the expenditure on use of any other club facilities will be considered as Fringe Benefit. It appears that this item will cover expenditure on use of the club facilities; i.e., direct expenditure for actual use of the club facilities. This item will not cover initial expenditure on corporate membership of the club. Such fees cannot be considered as expenditure on use of the club.
ii. As stated earlier, this expenditure will have to be limited to the use of the club facilities by employees or members of their families. Again, expenditure relating to food, snacks, beverages etc. consumed at a club will not fall under this item but it will have to be considered in para 4.5 above and 20% of such expenditure can be considered as Fringe Benefit.
iii. From the wording of the clause it appears that expenditure for membership of social/service clubs such as LionsClub, Rotary Club etc. will not be covered under this item.
29. Gifts (50%) i. 50% of the expenditure on gifts will be considered as Fringe Benefit. As stated earlier, only gifts to employees or their family members will be covered by this item. This will include cost of gift articles, marriage gifts, birthday gifts etc.
ii. Gifts given to persons other than employees or their family members will not be covered by this item. Therefore, marriage gifts, birthday gifts, and distribution of gift articles to customers and others will not be covered by this item.
30. Scholarships (50%) i. 50% of the expenditure on scholarships will be considered as Fringe Benefit. As stated earlier, scholarships to employees and their family members only will have to be considered under this item. Normally, a scholarship will mean amount given to a person who has scored distinction in his educational career. Therefore, if a scholarship is given to those who have acquired merit in his education will be covered by this item.
ii. Any amount given by way of scholarship to a student to meet the cost of his education will be considered as income of that student and it will be taxable in his hands subject to the exemption provided under section 10(16) of the Income-tax Act. Therefore, a view can be taken that the amount given to students to meet the cost of education will not be considered as scholarship for the purpose of this item. The employer will have to keep separate accounts for such expenses. To sum up 31. The Finance Minister has indicated in several interviews that the intention is to tax only collective benefit enjoyed by the employees and not to tax any business expenditure. The manner in which provisions are made shows that the burden of this new tax will fall on the employer even in respect of certain benefits enjoyed by highly paid employees and directors which can be identified individually. In this process certain business expenses will also be subjected to this tax.
32. The manner in which the various provisions are made, make it clear that the assessees will have to get involved in lot of litigation. The concept of expenditure on (i) Entertainment, (ii) Hospitality, (iii) Conference, (iv) Travel, (v) Conveyance, (vi) Sales promotion and publicity, (vii) Employee’s welfare, (viii) Privilege, service, facility or amenity to employees, (ix) Telephone and mobile phone, (x) Guest House, (xi) Festival celebrations, (xii) Club facilities, (xiii) Scholarships etc. is not very clear. There are many conflicting judgments on these issues under the Income-tax Act. That was the reason why provisions for disallowance of some of these expenses in the past were deleted on the ground that they are complicated. It appears that another round of litigation for interpretation of these terms for computation of Fringe Benefits will start since this new tax is brought into force from the current year.
33. During the course of his reply to the discussions on this year’s budget the Finance Minister stated in the Lok Sabha on 2nd May, 2005, that the assessees will have to get their accounts relating to expenditure on "Fringe Benefits" audited by a Chartered Accountant. He also stated that the Institute of Chartered Accountants of India will issue Guidance Note for this purpose and if the certificate given by the Chartered Accountants is produced by an assessee, the Assessing Officer will not question the computation of Fringe Benefits. In the Finance Act, as passed, there is no such requirement of obtaining audit report or certificate from a Chartered Accountant. Therefore, one will have to wait for a clarification from the Government about this requirement of Audit.
34. In order to reduce the litigation the following suggestions were made after the Finance Bill was introduced. i. The existing Rule 3 of the I.T. Rules should be retained, so that perquisites and fringe benefits which are enjoyed by employees individually are taxed in their hands as hitherto. This procedure is well tested for years and need not be disturbed.
ii. It is true that some personal benefits enjoyed by employees collectively cannot be identified and taxed in their hands individually. If the intention is to tax such benefits, the amount can be worked out by estimating some percentage of expenditure with reference to total payment made to employees. In other words, some percentage ( say 10%) of the salaries and wages can be deemed to be for Fringe Benefits collectively enjoyed by the employees and tax can be levied on this amount.
iii. Instead of requiring every employer to file a separate return, pay advance tax, and undergo separate assessment and appellate procedure, it can be provided in section 37 of the Income-tax Act to disallow this expenditure as collective Fringe Benefit to employees. This will simplify the administration of this tax and reduce litigation.
iv. In the case of persons who are engaged in small businesses or professions, it would not be equitable to levy such a tax because no significant Fringe Benefits are provided to employees by such employers. Therefore, exemption from this tax can be granted where the turnover/gross receipts are less than Rs. 5 crores. In the alternative, the exemption can be granted where the employees do not exceed 50. In any event, there should be a basic exemption limit (say Rs. 50,000/-) for the computation of Fringe Benefits. It may be noted that even when expenditure on entertainment, motor car, travelling expenses, sales promotion etc. was being disallowed u/s 37 earlier, exemption limit up to Rs. 1 lakh was fixed.
v. The Fringe Benefit Tax should be allowed as deduction in computing total income.
35. It is rather unfortunate that the Finance Minister has not accepted the above suggestions. The adverse effect of these new provisions will be felt by small assessees like partnership firms who have two or three employees whose salary is below taxable limit and who do not enjoy any fringe benefit. If the firm has incurred expenditure on providing tea and snacks to employees outside office, conveyance expenses for staff, telephone expenses or similar expenses aggregating to Rs. 15,000, the firm will be considered to have given fringe benefit of Rs. 3,000. The firm will have to pay Rs. 1,010 in 4 quarterly installments of Rs. 253 each on 15th July, 15th October, 15th January and 15th March. Further the firm will have to file separate return for fringe benefit and undergo assessment procedure. We have only to imagine about the unnecessary paper work involved in the implementation of this new provision. Apart from this paper work, one has to imagine the cost and harassment involved in the process. The Finance Minister has stated in the Lok Sabha that this new tax will increase the burden of tax by 1.5% of the total income. It is for consideration as to what could be the logic of reducing rate of tax on companies and firms from 35% to 30% and then levying such Fringe Benefit Tax involving so much of paper work and cost to assessees and to the Government to collect only 1.5% of total income.
28 March 2009
FBT is Fringe Benefit Tax. It is a tax payable by the employer on the expenses incurred. The Logic behind such Tax is all the facilities provided by employer to employee is not utilised only for official purpose but personal also . Some expenses we can not segregate the official use and personal use. Hence the tax. For example Telephone expenses. Always office telephone is not used for official use only . so some part of it is considered as personal and on that Fringe Benefit tax is being calculated.
If you wan to know more about the same let me know.
28 March 2009
As per the Finance Bill, fringe benefits shall be deemed to have been provided if the employer has incurred any expense or made any payment for the purposes of:
* (a) entertainment; * (b) festival celebrations; * (c) gifts; * (d) use of club facilities; * (e) provision of hospitality of every kind to any person whether by way of food and beverage or in any other manner, excluding food or beverages provided to the employees in the office or factory; * (f) maintenance of guest house; * (g) conference; * (h) employee welfare; * (i) use of health club, sports and similar facilities; * (j) sales promotion, including publicity; * (k) conveyance, tour and travel, including foreign travel expenses; * (l) hotel boarding and lodging; * (m) repair, running and maintenance of motor cars; * (n) repair, running and maintenance of aircraft; * (o) consumption of fuel other than industrial fuel; * (p) use of telephone; * (q) scholarship to the children of the employees.
28 March 2009
I beg to differ with Sri Manmohan's categorisation of FBT as "one of the most controversial pieces of legislation in recent times"
It is not "one of the most" but "most" controversial piece of legislation.
Intent of the FM for taxing payments made to or for the benefit of employees which were escaping Income Tax for one reason or the other in the assessment of individual employees is definitely good.
But whole problem is in translating FM's intent into action
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