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TMI BlogFinance Act, 2005 - Explanatory Notes on the Provisions relating to Fringe Benefit TaxX X X X Extracts X X X X X X X X Extracts X X X X ..... ing horizontal equity. Further, fringe benefits are generally provided to senior executives in the organization. Therefore, under-taxation of fringe benefits also violates vertical equity. It also discriminates between companies which can provide fringe benefits and those which cannot thereby adversely affecting market structure. However, the taxation of fringe benefits raises some problems primarily because- (a) all benefits cannot be individually attributed to employees, particularly in cases where the benefit is collectively enjoyed; (b) of the present widespread practice of providing perquisites, wherein many perquisites are disguised as reimbursements or other miscellaneous expenses so as to enable the employees to escape/reduce their tax liability; and (c) of the difficulty in the valuation of the benefits. 2.2 In India, prior to assessment year 1998-99, some perquisites/fringe benefits were included in salary in terms of section 17 and accordingly taxed under section 15 of the Income-tax Act in the hands of the employee and a large number of fringe benefits were taxed by the employer-based disallowance method where the quantum of the disallowance was estimated on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... items of expenses, etc. Such a method has the virtue of simplicity, minimum disputes, low compliance cost, and less administrative burden. Accordingly, the scope of the term fringe bene-fits deemed to have been provided is defined in sub-section (2) of section 115WB so as to provide that fringe benefits shall be deemed to have been provided by the employer if he has incurred any expense on, or made payment for, the purposes summarized below:- (A) entertainment; (B) provision of hospitality of every kind to any person, whether by way of food or beverages or in any other manner excluding food or beverages provided to the employees in the office or factory or non-transferable paid vouchers usable only at eating joints or outlets; (C) conference excluding fee for participation by the employees in any conference; (D) sales promotion including publicity but excluding specified expenditure on advertisement; (E) employee welfare excluding any expenditure or payment made to fulfil any statutory obligations or mitigate occupational hazards or provide first aid facilities in the hospital or dispensary run by the employer; (F) conveyance, tour and travel (including for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... car, a lower rate of 5% of expenses on repair, running (including fuel) and maintenance of motor cars and depreciation thereon has been specified; (v) In the case of an employer engaged in the carriage of passengers or goods by aircraft, the value of fringe benefits under the head expenses on repair, running (including fuel) and maintenance of aircrafts and depreciation shall be Nil. 3.5 Further, sub-section (3) of section 115WB provides that the privilege, service, facility or amenity referred to in sub-section (1) of the said section does not include perquisites in respect of which tax is paid or payable by the employee. 4. Taxable Entities (Who is liable to pay the tax?) 4.1 The FBT is payable by an employer who is,- (i) a company; (ii) a firm; (iii) an association of persons or a body of individuals, excluding any fund, trust or institution eligible for exemption under clause (23C) of section 10 or registered under section 12AA; (iv) a local authority; or (v) an artificial juridical person. 4.2 The tax on fringe benefits is payable by the employer even if he is not liable to pay income tax on his total income computed in accordance with the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer is required to make an assessment of the return of fringe benefits furnished by the employer under section 115WE and determine the tax or interest payable by him or refund due to him. The procedure for assessment under this section is similar to the corresponding provisions for assessment of a return of income under section 143 of the Act. 8.2 Where the employer fails to furnish a return of fringe benefits or fails to comply with the terms of a notice issued under section 115WE(2), the Assessing Officer is required to make the assessment to the best of his judgment, after giving the assessee a reasonable opportunity of being heard. The provisions of section 115WF correspond to the provisions of section 144 in relation to assessment of a return of income. 8.3 Where the Assessing Officer has reason to believe that any fringe benefits chargeable to tax have escaped assessment for any assessment year, section 115WG provides for the reassessment of such fringe benefits which have escaped assessment. This provision corresponds to section 147 of the Act in relation to income escaping assessment. 8.4 Section 115WH requires the Assessing Officer to serve a notice on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... WB of the Income-tax Act. These purposes are enumerated in para 3.3 of this circular. Whether employer-employee relationship is a pre-requisite for the levy of FBT? 2. Yes. Whether FBT is payable by an entity having no employee? For example, will law firms having retainer-relationship arrangements and no employees be liable to pay FBT? 3. An entity, which does not have any employee on its rolls, will not be liable to FBT. Therefore, law firms having retainer-relationship arrangements and no employees will not be liable to FBT. Whether FBT is leviable on a company (registered under section 25 of Companies Act) even if it is registered u/s 12AA or its income is exempt u/s 10(23C)? 4. FBT is not payable by a trust, fund or institution if its income is exempt under section 10(23C) or it is registered under section 12AA of the Income-tax Act. Therefore, a company registered under section 25 of the Companies Act will also not be liable to FBT if its income is exempt under section 10(23C) or such company is registered under section 12AA of the Income-tax Act. FBT is a presumptive tax. Is the presumption rebuttable? 5. FBT is payable by an entity if it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion fails, the charging section cannot be effectuated. Therefore, if there is no provision for computing the value of any particular fringe benefit, such fringe benefit, even if it may fall within clause (a) of sub-section (1) of section 115WB, is not liable to FBT. Whether the value of any benefit provided by the employer to its employees by way of allotment of shares, debentures, or warrants directly or indirectly under any Employees Stock Option Plan or Scheme of the company, is liable to FBT? 8. The value of any benefit provided by the employer to its employees by way of allotment of shares, debentures, or warrants directly or indirectly under any Employees Stock Option Plan or Scheme of the company is a fringe benefit within the meaning of clause (a) of sub-section (1) of section 115WB. However, in the absence of a computation provision in respect of such benefits, the charging section fails. Therefore, the value of such benefits is not liable to FBT. Whether reimbursement of expenditure to an employee purely of a business nature is liable to FBT? (For example, payment of sales tax or stamp duty paid on behalf of the employer and reimbursed later to him). 9. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purposes of conveyance, tour and travel is essentially a component of professional fee paid by the client to the lawyer or auditor. Accordingly, such expenditure is not liable to FBT in the hands of the client. Do the words any expense in sub-section (2) of section 115WB refer to all expenses or restricted to those incurred on the employees and their families? 14. Under sub-section (2) of section 115WB, fringe benefits shall be deemed to have been provided by the employer to his employees, if the conditions specified therein are satisfied. Hence, if the employer has incurred any expense for any one of the purposes enumerated in clauses (A) to (P) of sub-section (2) of section 115WB, the whole of that expense falling under the relevant head shall be deemed to have been provided. No segregation as expenses incurred on employees or expenses incurred on others is permissible. Whether the expenses need to be segregated into those incurred for official purposes and those for personal purposes? 15. Fringe benefit is deemed to have been provided if the employer has incurred expenses for any of the purposes referred to in sub-section (2) of section 115WB. A proportion (20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with the provisions of section 115WC of the Income-tax Act. The value of such fringe benefits is determined, inter alia, as a proportion of the total amount of expenses incurred for some identified purposes. In the case of an Indian company having employees based both in India and in a foreign country, FBT is payable on the proportion (50 per cent, 20 per cent or 5 per cent, as the case may be) of the total amount of expenses incurred for the purposes referred to in clauses (A) to (P) of sub-section (2) of section 115WB and attributable to the operations in India. If the company maintains separate books of account for its Indian and foreign operations, FBT would be payable on the amount of expenses reflected in the books of account relating to the Indian operations. If however, no separate accounts are maintained, the amount of expenses attributable to Indian operations would be the proportionate amount of the global expenditure. Further, such proportionate amount shall be determined by applying to the global expenditure the proportion which the number of employees based in India bears to the total worldwide employees of the company. Whether an Indian company carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablishment in India, FBT is payable on the expenditure incurred or payment made for the purposes referred to in clauses (A) to (P) of sub-section (2) of section 115WB and attributable to the operations of the permanent establishment of the foreign company in India irrespective of whether the expenditure attributable to the operations of the permanent establishment are incurred in India or outside India. Whether credit for FBT would be available in the foreign country of residence? 28. The credit for FBT paid in India may be available in the foreign country of residence on the basis of the tax laws prevailing in that foreign country and in the light of the provisions of the Double Taxation Avoidance Agreement between India and that foreign country. Salary allowance/benefits to persons posted in overseas countries attract tax in those countries. However, such persons are exempt from taxation in India. Would the introduction of FBT change the situation? 29. The introduction of FBT will have no adverse effect on the tax liability of persons posted in overseas countries. Such persons will continue to pay tax in the foreign countries and enjoy the benefit of DTAA, if any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urs a total expenditure of Rs. 10 lakhs on repair, running and maintenance of motor-cars, and recovers Rs. 1 lakh from its employees, the value of the fringe benefit in respect of repair, running and maintenance of motor-cars shall be calculated on the basis of the net expenditure of Rs. 9 lakhs (i.e., Rs. 10 lakhs minus Rs. 1 lakh). At times, an employer could have cost sharing agreement with its group companies wherein a particular item of cost will be shared in an agreed proportion. In such a case, for administrative convenience, the employer may pay for the total cost and claim reimbursement from other group companies. Whether the employer making the payment is liable to FBT on the whole amount or only in respect of his share? 33. The share of each of the group companies in the total expenditure is the expenditure incurred by the respective company though the payment is made by one company. Hence, the company making the payment shall be liable for FBT only in respect of its share. Similarly, the other group companies will be liable to FBT in respect of their respective shares. Section 115WC(1)(a) provides for valuation of fringe benefits referred to in section 115WB( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If an expenditure is found to be bogus on the plea that it has not been actually incurred, the same is not allowed as a deduction under section 37 of the Income-tax Act. Accordingly, FBT will be levied only on such expenditure as is actually incurred for the purposes referred to in sub-section (2) of section 115WB. For example, if an employer has incurred Rs. 1000 towards travel, of which Rs. 200 is disallowed under section 37 of the Income-tax Act on the plea that it is bogus, FBT will be payable on 20 per cent of Rs. 800 (Rs. 1000 minus Rs. 200). Whether, for the purposes of payment of advance tax, depreciation should be taken on a pro rata basis or lumped in the last quarter? 37. For the purposes of payment of advance tax on fringe benefits tax depreciation should be taken on a pro rata basis for payment of advance FBT. Would contributions to approved gratuity fund or provident fund attract FBT? 38. Section 115WB read with section 115WC does not specifically contain any provision for chargeability of contribution to approved gratuity fund or provident fund to FBT. Accordingly, the contribution to the aforesaid funds would not attract levy of FBT. Whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning of salary as defined in clause (1) of section 17 of the Income-tax Act. These benefits are taxable under the head Salaries subject to the exemption under clause (5) of section 10 of the Income-tax Act. Accordingly, it would not be liable to FBT. However, if the leave travel concession/assistance is not included in salary as defined in section 17 will be classified as an expense for the purposes referred to clause (F) of sub-section (2) of section 115WB and will accordingly be liable to FBT. How will the value of a free air ticket provided by an employer engaged in the business of carriage of passengers or goods by aircraft be taken e.g., normal fare or concessional fare e.g. apex fare or senior citizens concessional fare or the actual cost of the ticket to the employer? 45. In terms of the provisions of clause (a) of sub-section (1) of section 115WC, the value of a free or concessional ticket is the cost at which the ticket is provided by the employer to the general public as reduced by the amount, if any, paid by, or recovered from his employees. The cost at which the ticket is provided by the employer to the general public shall be the price of the ticket which an o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all within the meaning of salary as defined in clause (1) of section 17 of the Income-tax Act and, any expenditure incurred for the purposes of salary, does not fall within the scope of sub-section (2) of section 115WB. Therefore, such perquisites fall outside the scope of clauses (b) and (c) of sub-section (1) as well as sub-section (2) of section 115WB. What is the scope of the expression entertainment in clause (A) of section 115WB(2)? 49. The meaning of the word entertainment in clause (A) of sub-section (2) of section 115WB is of wide import. It includes all expenditure in connection with exhibition, performance, amusement, game or sport, for affording some sort of amusement and gratification. An employer has an exclusive training centre which is used to train its employees on various topics. Would any expenditure in the nature of food or beverages provided by the employer at such training centre to the employees attending the training be excluded from fringe benefits by virtue of the exception provided by section 115WB(2)(B)(i) or (ii)? 50. If an employer owns an exclusive training centre used to train its employees, such training centre shall be construed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause (ii) of clause (B) of sub-section (2) of section 115WB, any expenditure on or payment made through paid vouchers which are not transferable and used only at eating joints or outlets, is not liable to FBT. Whether expenditure incurred for attending training programmes organized by trade bodies or institutions is liable to FBT? 54. A training programme entails congregation of a number of persons for discussion or exchange of views. Therefore, expenditure incurred for attending training programmes organized by trade bodies or institutions or any other agency falls within the scope of the provisions relating to expenditure incurred for the purposes of conference contained in clause (C) of sub-section (2) of section 115WB and will be liable to FBT. Whether expenditure in the nature of fee for participation by the employees in any conference is liable to FBT? 55. In terms of the provisions of clause (C) of sub-section (2) of section 115WB, expenditure in the nature of fee for participation by the employees in any conference is not liable to FBT. However, if the participation fee includes any expenditure of the nature referred to in clauses (A), (B) and (D) to (P) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y referred to in clause (D) of sub-section (2) of section 115WB and, therefore, not liable to FBT. Whether sales promotion includes sales discount or rebates to wholesalers or customers or bonus points given to credit card customers and, if so, whether FBT is payable thereon? 60. Sales discount or rebates allowed to wholesale dealers or customers from the listed retail price merely represent lesser realization of the sale price itself. The bonus points given to credit card customers are also in the nature of deferred sale discount. Therefore, discounts or rebates or bonus points allowed to customers or wholesale dealers are in the nature of selling expenses and outside the scope of the provisions of clause (D) of sub-section (2) of section 115WB of the Income-tax Act. Accordingly, such discounts or rebates are not liable to FBT. Whether expenditure on incentives given to distributors for meeting quantity targets (including free goods for achieving certain sales target like, 100 free televisions for achieving a target sale of 10,000 televisions and cash incentives adjustable against future supplies) is liable to FBT? 61. Incentives given to distributors for meeting s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax Act and hence, it should be given its natural meaning. The term is of wide import. Following Honble Supreme Courts decision in the case of Eskayef Ltd. Etc. (245 ITR 116), any expenditure on free medical samples distributed to doctors is in the nature of sales promotion. Therefore, it would be liable to FBT. Similarly, any expenditure on free samples of other products distributed to trade or consumers would also be liable to FBT. Whether expenditure on making ad-film is liable to FBT? 65. An ad-film is a medium for advertisement and therefore falls within the scope of clause (i) of the proviso to clause (D) of sub-section (2) of section 115WB. Therefore, any expenditure on making an ad-film is not liable to FBT. Whether expenditure on free offers (with products) such as freebies like tattoos, cricket cards or similar products, to trade or consumers (excluding employees) is liable to FBT? Further, whether expenditure incurred on the artwork or for payment of royalty charges in respect of such freebies is liable to FBT? 66. Any expenditure (including expenditure on artwork and royalty charges) on free offers (with products) such as freebies like tattoos, cri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up Medical Insurance or Group Life Insurance is for the purposes of employee welfare and, therefore, falls within the scope of clause (E) of sub-section (2) of section 115WB of the Income-tax Act. Accordingly, such expenditure is liable to FBT. However, if such expenditure is a statutory obligation, the same would not be liable to FBT. Whether expenditure incurred at a hospital/dispensary, not maintained by the employer, for injuries incurred during the course of employment, is liable to FBT? 71. In terms of the Explanation to clause (E) of sub-section (2) of section 115WB, any expenditure incurred or payment made to provide first aid facilities in a hospital or dispensary run by the employer is not considered as expenditure for employees welfare. Therefore, if the expenditure is incurred for treatment of injuries suffered in the course of performance of duties but the treatment is at a hospital/dispensary not maintained by the employer, such expenditure is liable to FBT. However, if such expenditure is pursuant to a statutory obligation, it will not be liable to FBT. Whether subsidy provided to a school not meant exclusively for employees children is liable to FBT? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y provided to the children of employees is liable to FBT? 77. The expenditure incurred for the purpose of providing transport facility to the children of employees is in the nature of expenditure on employees welfare within the meaning of clause (E) of sub-section (2) of section 115WB. Accordingly, such expenditure is liable to FBT. Whether the reimbursement in respect of car expenses on the basis of bills submitted and drivers salary on the basis of a declaration provided, booked as salary, though treated as non-taxable reimbursement, attract FBT? 78. The reimbursement in respect of car expenses on the basis of bills submitted and drivers salary on the basis of declaration provided fall outside the scope of salary within the meaning of clause (1) of section 17 of the Income-tax Act. Therefore, any expenditure towards such reimbursement is effectively expenditure incurred by the employer for the purposes of conveyance, tour and travel. Since the expenditure for such reimbursement is for the purposes referred to in clause (F) of sub-section (2) of section 115WB relating to conveyance, tour and travel, and is liable to FBT. On some occasions, employers prefer to give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch rent shall be treated as expenditure within the scope of clause (1) of sub-section (2) of section 115WB. Whether the amount of depreciation on motor-car or any other asset should be the amount calculated as per the Income-tax Act or as per commercial accounting? If tax depreciation, how is the same to be computed in view of the concept of block of assets? 83. The depreciation on motor-car or any other asset for the purposes of FBT shall be the depreciation computed under the provisions of section 32 of the Income-tax Act. Further, such amount shall be the whole of the amount of depreciation in respect of the relevant block of assets. For example, for the purposes of depreciation on motor-car, the amount of depreciation relating to the block of assets - motor-cars - shall be included within the scope of clause (H) of sub-section (2) of section 115WB. Whether expenditure by way of interest on loans taken for purchase of cars is liable to FBT? 84. Interest on loans taken for purchase of cars falls within the scope of clause (H) of sub-section (2) of section 115WB relating to repair, running and maintenance of motor cars. Accordingly, expenditure by way of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircrafts referred to in clauses (H) and (I) of sub-section (2) of section 115WB] and is not liable to FBT. Whether expenditure for use of telephone includes (i) expenditure for use of telephone installed in the office and (ii) payment of telephone (including mobile phone) bills in the name of the company directly made by the company? 90. In terms of the provisions of clause (J) of sub-section (2) of section 115WB, expenditure incurred or payment made for the purposes of use of telephone (including mobile phone) other than expenditure on leased telephone lines is liable to FBT. Therefore, expenditure on use of telephones (including mobile phones) installed in the office is liable to FBT. This is so, irrespective of whether the telephone is in the name of the company or not and also whether payment for its use is made directly or indirectly by the company. Will expenditure on capital items (e.g., fridges, TVs) in a guesthouse be liable for FBT? 91. Expenditure on items like refrigerators, televisions, furniture and similar items in a guesthouse would not fall within the scope of clause (K) of sub-section (2) of section 115WB since the proximate objective of incurring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yees and their family members on the occasion of any festival like Navratri, Diwali Id, Christmas or New Year is expenditure on festival celebrations. Such expenditure would, therefore, fall within the scope of clause (L) of sub-section (2) of section 115WB. Expenditure on meeting/get-togethers of employees and their families on non-festival occasions (including annual day), may be classified as expenditure on entertainment within the meaning of clause (A) of sub-section (2) of section 115WB or as expenditure on employees welfare within the meaning of clause (E) of sub-section (2) of section 115WB of the Income-tax Act. Such expenditure is liable to FBT. However, expenditure on celebration of Independence Day and Republic Day will not be liable to FBT because they are not festivals as normally understood. Whether payment of entrance or membership fee of a club or health club or similar facility would be expenditure incurred on use of such facilities? 96. Entrance or membership fee of a club or health club or similar facility is a fixed levy allowing for use of some basic club facilities (like the lounge facilities). Therefore, such payments are also expenditure incurred on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure incurred or payment for the purposes of scholarship irrespective of whether the recipient is an employee or his relative or any other person. Whether FBT would be allowable deduction while computing book profit under section 115JB? 103. FBT is a liability qua employer. It is an expenditure laid out or expended wholly and exclusively for the purposes of the business or profession of the employer. However, sub-clause (ic) of clause (a) of section 40 of the Income-tax Act expressly prohibits the deduction of the amount of FBT paid, for the purposes of computing the income under the head profits and gains of business or profession. This prohibition does not apply to the computation of book profit for the purposes of section 115JB. Accordingly, the FBT is an allowable deduction in the computation of book profit under section 115JB of the Income-tax Act. Whether expenditure incurred by the employer for the purposes of providing free or subsidized transport for journeys to employees from their residence to the place of work or such place of work to the place of residence would attract FBT ? 104. The free or subsidized transport provided to employees for journeys ..... X X X X Extracts X X X X X X X X Extracts X X X X
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