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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 ..... , 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 presumptive basis. In practice, ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city, 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 foreign travel); (G) use of hotel, boarding and lodging facilities; (H) repair, ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 provisions of the Income-tax Act other than the provisions of Chapter XII-H. Tax Rate 5. FBT shall be payable at the rate of 30% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 assessee before making an assessment or reassessment under section 115WG requiring the assessee to file a return in the prescribed form and manner. The notice can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able 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 is an employer. There is no presumption in law regarding an entity being an employer. Therefore, whether an entity is an employer or not is rebuttable. The value of fringe benefit is determined by a presumptive method by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able 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. Reimbursement of expenditure to an employee is a fringe benefit provided to an employee within the meaning of clause (a) of sub-section (1) of section 115WB. However, the FBT is payable only in respect of such reimbursements which are for the purposes listed in clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses 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% or 50% or 5% as the case may be) of the whole of the expenses falling under the relevant head in sub-section (2) of section 115WB will be taken as the taxable value of the fringe benefits. There is no requirement to segregate the various expenses referred to in section 115WB, between those incurred f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 carrying on business outside India would be liable to FBT even though none of its employees in such business may be liable to pay income tax in India? 21. An Indian company would be liable to the FBT in India if it has employees based in India. Therefore, if an Indian company carries on business outside India but does not have any emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred 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, in India. Whether FBT is payable by foreign companies deputing personnel to India for short duration under technical supervision contracts? Whether expenses incurred for the various purposes enumerated in clauses (A) to (P) of sub-section (2) of section 115WB is liable to FBT if such expenses are reimbursed by the Indian entity to the foreign company or the Indian entity directly b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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(1)(b), at cost at which such benefits is provided by the employer to the general public. Does section 115WB(1)(b) therefore, apply only to a situation where the employer is in the business of carrying passengers, i.e., airline companies, surface transport companies, etc.? 34. The provisions of clause (b) of sub-section (1) of section 115WB read with the provisions of clause (a) of sub-section (1) of section 115W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the provisions of FBT will apply to an assessee who has practically closed the business but is in the process of winding up? 39. Every employer, who incurs any expenditure of the nature referred to in sub-section (1) or sub-section (2) of section 115WB, would be liable to FBT. Whether the FBT will be applicable to a company or a firm which is deriving income from house property like warehouses, IT park etc. and provides lot of other facilities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 ordinary passenger is expected to pay on the date of purchase of the ticket for the date, time and the class of travel. Similarly, in a case where an open ticket is issued a number of days in advance but the reservation is generally confirmed a few hours before departure, the value of the free or concessional ticket shall be the cost of the ticket which an ordinary passenger seeking reservation a few hours before departure is liable to pay as reduced by the amount, if any, paid by or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 an office or a factory within the meaning of the exclusion provided in sub-clause (i) of clause (b) of sub-section (2) of section 115WB. Accordingly, any expenditure on food or beverages provided by the employer at such training centre to the employees is not liable to FBT. However, if the exclusive training centre is hired by the employer on a temporary basis, such training centre cannot be construed as an office or a factory within the meaning of the exclusion provided in sub-clause (i) of clause (b) of sub-sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sub-section (2) of section 115WB, such expenditure will be liable to FBT. Whether FBT will apply to the expenditure incurred for the purposes of conferences of the agents or dealers or development advisors? 56. In terms of the provisions of clause (C) of sub-section (2) of section 115WB, any expenditure incurred for the purposes of conference is liable to FBT irrespective of whether the conference is of agents or dealers or development advisors or any other persons. Therefore, the expenditure incurred for the purposes of agents or dealers o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 sales targets (including free goods given as incentive to distributors for achieving certain sales and cash incentives adjustable against future supplies) are in the nature of performance-based commission. Such performance-based commission is in the nature of ordinary selling cost. Therefore, expenditure incurred for the purpose of providing incentives given to distributors for meeting sales targets (including free goods for achieving certain sales target and cash incentives adjustable against future supplies) do not fall within the scope of clause (D) of sub-section (2) of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, cricket cards or similar products, to trade or consumers (excluding employees) is for the purposes of sales promotion and, publicity and accordingly, liable to FBT. Whether expenditure incurred for hotel stay, air ticket charges etc. in relation to customer/clients is liable to FBT? 67. Any expenditure incurred for the purposes of lodging and boarding or travel of customer/clients could be classified either under the provisions of clause (D) or clause (G) of sub-section (2) of section 115WB and, accordingly, liable to FBT. Whether FBT is payable on payment by the employer for Group Personal Accident/Workman C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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? 72. Any subsidy provided to a school not meant exclusively for employees children is in the nature of expenditure incurred for the proximate purposes of promoting employee welfare. Therefore, such subsidy falls within the scope of clause (E) of sub-section (2) of section 115WB relating to employees welfare and accordingly liable to FBT. Whether expenditure incurred on provision and maintenance of facilities like garden, site cleaning, light decoration, school, library, mess, television, cable connection etc. in employees colonies is liable to FBT? 73. Any expenditure incurred for the provision of facilities like garden, site cleaning, light d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 a per diem allowance for meeting the expenditure on lodging and boarding rather than making payments on actual basis. The per diem allowance is exempt from tax under section 10(14). Would this be subject to FBT? 79. Since the per diem allowance is paid for the purposes of use of hotel, boarding and lodging facilities, it would fall within the scope of clause (G) of sub-section (2) of section 115WB. However, the employees will not be liable to pay income-tax on any surplus accruing to him from such allowance. Where the business consists partly of software development and partly of manufacture of say, FMCG products, whether the benefit of valuation at a lower rate of 5% instead of 20% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt 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 on loans taken for purchase of cars is liable to FBT. Whether expenditure on repair, running and maintenance of delivery/display vans, trucks/lorries, ambulances and tractors is liable to FBT? 85. Delivery/display vans, trucks/lorries, ambulance and tractor are not "motorcars" within the meaning of clause (H) of sub-section (2) of section 115WB. Therefore, expenditure on the running, repair and maintenance of such vehicles is not liable to FBT. Whether the amount of depreciation on the club building is liable to FBT? 86. Where the legislature has intended to subject the amount of depreciation on any capital asset to FBT, it has specifically provided for it as in clauses (H) and (I) of sub-section (2) of section 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame 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 such expenditure is the acquisition of a capital asset. Further, depreciation on these assets would also not be liable to FBT in the absence of any specific charge. Would maintenance of a guest house include payment of rent for the guest house? 92. Any rent paid for maintaining a guest house would fall within the scope of clause (K) of sub-section (2) of section 115WB and, accordingly, is liable to FBT. Whether expenditure on all guest houses is liable to FBT or restricted to expenditure on holiday homes? 93. In terms of the provisions of clause (K) of sub-section (2) of section 115WB, FBT is payable on expenditure incurred for the purposes of maintenance of any accommodation in the nature of guest house other than accommodation used for training purposes. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 use of club or health or similar facilities and accordingly liable to FBT. Whether expenditure on gifts under trade schemes or for promotion of companys products to distributors/retailers is liable to FBT? 97. Ordinarily, a gift is defined as anything given or presented without consideration. Therefore, expenditure on gifts under trade schemes or for promotion of companys products to distributors/retailers, falls within the scope of the provisions of clause (O) of sub-section (2) of section 115WB and, accordingly, is liable to FBT. Does a gift to customer fall under sales promotion or gift? 98. In terms of the rules of interpretation of a statute, a specific provision in law overrides a general provision. Therefore, a gift to a customer, even though for the purposes of sales promotion, would fall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5JB 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 from their residence to the place of work or such place of work to the place of residence is in lieu of conveyance/transportation allowance, which is not liable to FBT. Accordingly, the 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 will not be liable to FBT. What is the meaning of the term computer software as referred to in section 115WC? Will it include information technology enabled services? 105. Clause (d) of sub-section (2) of section 115WC provides for a lower percentage for valuation of fringe benefits for the purposes referred to in clauses (F) and (G) of sub-section (2) of section 115WB in the case of an employer engaged in the business of manufacture or production of com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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