QUESTIONS & ANSWERS
Fringe Benefit Tax — worst fears come true
Circular No. 8 of 2005 dated August 29 has brought out clarifications on Fringe Benefit Tax (FBT). The press report would appear to indicate that it is limited to actual fringe benefits given to the employees. Is this correct?
It is not correct. Fringe benefits are limited to actual benefits only to the extent it falls under Section 115WB(1). But where it is deemed under Sec. 115WB(2)(A) to (P), fringe benefits are deemed at an ad hoc percentage of the expenditure under the listed classifications of expenditure. In this sense, the circular (answering 107 queries) belies the hope entertained by business and industry, that it may, consistent with the stated objectives of this tax, be limited only to such expenses, where there is some benefit to the employees.
It is now made clear, as is even otherwise inferable from the language of the section, that an assessee as long as he is an employer, he may be liable for FBT on expenses, whether it relates to employees or not. Answer to Q.6 clarifies that FBT follows classification (A) to (P) in following words:
"The tax base relating to FBT is calculated on a presumptive basis as a proportion of the expenses incurred for the purposes referred to in sub-section (2) of Sec. 115WB.
Whether the actual expenditure on fringe benefits is more or less than the value of the fringe benefits calculated on the presumptive basis is of no consequence/ relevance."
In fact, FBT is attracted not merely where fringe benefits will be "more or less" than the amount on presumptive basis, but even where there may not be the remotest connection with benefits for employees. The circular confirms the worst fears, that it is a tax on business expenditure.
Is FBT a presumptive tax? Is the presumption rebuttable?
Answer to Q.No.5 in the circular clarifies that the inference as to who is the employer is rebuttable, but not the quantification of fringe benefits, which are inferred on presumptive basis as deemed fringe benefits under Sec. 115WB(2).
Are employers without employees also liable?
Employer is defined to include all persons listed in the definition of person under Sec. 2(31) with the exception only for individuals, Hindu Undivided Families and AOPs (including trusts) or other institutions covered by Sec. 12AA or 10(23C) of the Income-tax Act. It is now clarified that if such an assessee has no employee at all as in the case of a person having professional income as a lawyer with only retainer relationship arrangement (Q.2 & 3), there will be no liability for FBT. It is certainly a welcome concession, though extra-statutory. But even a small firm with a single employee, say an attender or peon, may invite liability even after this clarification.
Are all direct and indirect benefits to employees taxed in the hands of employees liable for FBT?
There are a few items which were feared as having been covered under Sec. 115WB(1) as any privilege, service facility or amenity, which is given directly or indirectly by an employer, whether by way of reimbursement or otherwise. The language is wide enough to cover any payment for the benefit of employees, so as to attract tax on 100 per cent of such payment. It is now clarified that a number of items, which will fall under the head "wages and salaries" or items for which computation is not provided, will not be liable for tax even in respect of items covered by Sec. 115WB(1). It is indicated that where a formula is provided as for evaluation of free or concessional tickets provided by transport operators to employees or family members under Sec. 115WB(1)(b), there will be liability.
Where there is no such provision for computation for items falling under Sec. 115WB(1), even if there is liability under this charging section, it fails for lack of computation, a technical explanation (Q.46) in justification for certain conclusions. Whatever the logic of such an argument for sparing liability on specific items falling under Sec. 115WB(1), it is welcome, though the inference that such computation is available for all items covered by Sec. 115WB(2) is not acceptable.
S. Rajaratnam
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