CA. Amit Daga
(Finance Controller CA. CS. CFA. CIFRS. M.COM. )
(9017 Points)
Replied 26 December 2007
Fringe Benefit Tax
The dreadful clutches of FBT ( Fringe Benefit Tax) have seemed to shake the Gifting festivals in India this year! The products backing on gifts, Diwali, Christmas and New Year parties will all be subject to the FBT ranging between an effective rate of 10 to 50 percent.
It is true that for the first time in India a new tax as Fringe Benefit Tax (FBT) has been levied on the tax paying public consequent to the provisions contained in the Finance Act, 2005. The tax is levied upon the Gifts that are given by the employer to the employees and also to its business associates. As per Sec. 115 WB (2)(T) the gifts given to the employees should constitute deemed fringe benefit as it is a part of employee's welfare and thus the expenditure on these gifts should be deemed to be fringe benefit to the extent of 20 per cent. Similarly, in respect of gifts given to business associates as also foreign collaborators and buyers or distributors, the expenditure on gift items should form a part of deemed fringe benefit on account of sales promotion and thus 20 per cent of the expenditure would be treated as deemed fringe benefit. To elaborate further according to the financial newspapers Fringe benefits as outlined in the Finance Bill, denotes any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment. Also the next time HLL, Cadbury or Pepsodent or any such companies offer freebies such as cups with a packet of tea or cold coffee shaker with instant coffee powder or a free toothbrush with pack of toothpaste, they will have to pay fringe benefit tax ( FBT ) on such expenditure. All these expenses are to be treated as sales promotion expenditure and therefore are liable to FBT. Similarly free samples of medicines distributed by pharmaceutical companies to doctors also qualifies as sales promotion expenditure and will therefore, attract FBT.
How to calculate the fringe benefit tax?
The value of fringe benefits shall be the aggregate cost incurred. That is, the total expense deducted will be considered for purposes of levying fringe benefit tax. From this, a certain percentage will be deducted. The difference therein will be taxed at the rate of 30%. However, the fringe benefit tax rate varies from 10 per cent to 50 per cent depending upon the expense incurred like for the use of telephones 10 percent fringe benefit tax will be charged, while entertainment expenses, festival expenses, gifts, use of club facilities, etc will be taxed at the rate of 50 per cent.
FBT wizard's effects on corporate gifting world.
As the FBT is levied on gifts or freebies given to the employer or client. The festive roar arising out of corporate offices this season may be somewhat doused by the fringe benefit tax, which has to be paid on corporate gifts. India Incorporation fears it will lose a lot of gambol this festival season as the fringe benefit tax on promotion offers and gifting crumple its ability to come out with high- decibel campaigns.
Big-time advertisers especially makers of consumer electronics items and fast moving consumer goods have been groaning about the impact of the FBT on their festival-season sales. Consumer durable companies that give away freebies such as a DVD player , colour TV or film / music software with a player etc could be asked to pay FBT on expenditure incurred on free offers.
Although FBT is set to increase the tax liability of companies, the FMCG companies are assumed to be the ones that would be biggest hit by it. It is said to make life difficult for the company decision-makers during the forthcoming festival season. Also the explanatory notes on FBT states that gifts given to employees will not be spared from the tax and so many companies are planning to do away with employee-related expenditure that attracts FBT.Though Corporate gifting is a relationship-building tradition and firms will have to weigh their options before deciding on the issue.
However, on the other hand many corporate gift manufacturers and suppliers also are of the same opinion as they feel that there will definitely be an impact but they don't expect FBT to discourage companies from buying gifts. They have found out that firms are shifting focus for more towards price undercutting than only gifting. Even the manufacturers of favoured gift items such as televisions, home appliances and watches etc put up an optimistic face expressing hopes of only a minimal impact. Gift sellers feel that the companies won't stop giving gifts but they might cut down on the expenses by 10-15 per cent and so is seen as many major companies however remains unfazed.
While some are of the opinion that corporate firms planning major sales promotions during the festival season, beginning with Diwali, will have to fork out at least 6 to 17 per cent extra expenditure, as gifts, free offers like buy-one-get-one free will attract the all-pervasive fringe benefit tax (FBT) introduced since the last Budget. The FBT kicked up a storm ever since it was introduced in the budget. Most of the pharmaceutical companies are spending crores of rupees by way of expenditure on free samples etc and expect that this expenditure should be outside the reach of deemed fringe benefit. Also Sales promotion expenditure which has no connection with direct or indirect enjoyment by the employees should also be outside the purview of FBT. Any expenditure, which has got no relation or connection with anyone of the employees and just is an expenditure of sales promotion, then such expenditure even should be completely outside the range of deemed fringe benefit. For many still the whole issue is not been clarified and they have their own queries like some wonder whether the diaries and calendars provided by the company would constitute deemed fringe benefit or not? Also an issue raised was whether the deeming provision in FBT covered expenses incurred only with relation to the employee, or whether it covers the entire gamut of expenses? In the absence of any clarification, a large number of taxpayers are having anxiety about treatment of this expenditure for the purpose of FBT. Many have strongly opposed the FBT taxation policy and a section of corporate India felt that festival celebration expenses should not be part of FBT. The industry is of the view that the gifts given to the employees should come within the purview of employee's welfare only because these gifts are given to the employees just because of employer-employee relationship. Similarly the gifts to customers and business associates should be treated as sales promotion expenditure because these gifts are given only because of intimate relationship of the customer with the client and thus they should be treated as sales promotion expenditure and not the expenditure on gifts. Some have clarified that the genuine business expenditure not even remotely connected with the employer-employee relationship has been subjected to the FBT, which is neither fair nor warranted.Though mercifully for the companies, expenditure on incentives given to distributors for meeting quantity targets have been spared from the levy of FBT. Companies offer free goods and cash incentives to dealers and distributors for meeting sales targets these expenses are treated as ordinary selling costs. But expenditure on conferences of agents and dealers will be liable to FBT.
The Fringe shadow might lead to lesser sale during festivals
With Corporate India pondering over the the FBT, it is likely that the companies would carefully plan out their expenditure budgets for the forthcoming festival season.Employers awaiting such festivities every year to promote their sales and enrich their human-resource relations may now see their enthusiasm knocked out with the FBT in picture. Gift dealers and suppliers of novelty gifts and promotional items are finding ways to either counter the impact of FBT or tweak promotional and gifting offers during this critical sales period i.e during three month festive season. According to corporate India , the FBT would lead to a lot of ambiguities and uncertainties and is considered to be one of the most controversial pieces of legislation in recent times.Some are also of the opinion that instead of simplifying our tax laws, this tax will create more complications and invite unending litigation. Lack of clarity in the industry about FBT and its impact on business still exists. Experts have been divided in their opinion on this issue over the past few months. Most of the CEOs surveyed said that the impact of the fringe benefit tax would be 'most severe' on Indian enterprises. They argued that advertisement and sales promotion expenses should not be included under fringe benefit tax. Previously Reports say that the finance ministry is considering reworking the taxable value of the fringe benefits proposed in the Budget.The taxable value could be brought down in some cases where the proposed deemed fringe benefits were felt to be high. The reworked fringe benefit tax structure is said to define the taxable expenses more clearly so that genuine business expenditure was not taxed. Hopefully our finance minister and his team will also take a revision at other expenses also. For now, fringe benefits will be subject to tax in the hands of India Incorporation at the rate of 33.67% (including surcharge and cess). The value against which such tax will be levied will differ in different instances. Until then during this peak gifting season the corporate gift manufacturers and suppliers only hope that their business does not get affected with the dragon of FBT coming into the corporate picture and prays to be spared from this naked FBT sword. Whether FBT provides relief or benefit to the taxpayer or it chills the taxpayer is to be seen by reference to each point of doubt.
CAclubindia
