The Central Board of Direct Taxes has issued a list of frequently asked questions with answers on Fringe Benefit Tax, clarifying some issues raised by the trade and industry at different fora after the presentation of the Finance Bill, 2005 and also after its enactment.
1. What are the prerequisites for the levy of FBT?
FBT is payable by a person if he satisfies the following conditions:-
- (i) He is an employer;
- (ii) He has employees based in India;
- (iii) He is a company or a firm or an association of persons or a body of individuals or a local authority or an artificial juridical person;
- (iv) His income is not exempt under section 10(23C) of the Income-tax Act or he is not registered under section 12AA;
- (v) He has provided the following fringe benefits:-
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(a) Contributes to an approved superannuation fund for employees;
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(b) Provides free or concessional tickets for private journeys of employees or their family members;
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(vi) He has, during 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) incurred any expense on, or made any payment for, the purposes referred to in clauses (A) to (P) of sub-section (2) Of section 115WB of the Income-tax Act. These purposes are enumerated in para 3.3 of this circular.
2. Whether employer-employee relationship is a pre-requisite for the levy of FBT?
Yes.
3. 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?
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.
4. 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)?
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.
5. FBT is a presumptive tax. Is the presumption rebuttable?
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 applying the proportions specified in section 115WC to the fringe benefits provided and deemed to have been provided by the employer and enunciated in section 115WB. The presumption implicit in the proportions specified in section 115WC is not rebuttable.
However, the amount of expense incurred or payment made, for the purposes listed in clauses (b) and (c) of sub-section (1) and clauses (A) to (P) of sub-section (2), of section 115WB, is to be determined according to the books of account.
6. Does FBT apply to foreign companies?
FBT will apply to foreign companies if it has employees based in India.
7. Whether FBT is chargeable from an entity even if its income is exempt under a Double Taxation Avoidance Agreement (DTAA)?
Exemption, if any, under a DTAA is only in respect of income of the entity. However, FBT is a liability of an entity qua employer. Therefore, FBT is payable by a non-resident employer if it fulfills the various conditions relating to its chargeability laid down in Chapter XII-H of the Income tax Act.
8. Whether foreign companies sending their employees on 'tour' to India required to pay FBT on their travel cost particularly when they are not subject to income tax in India?
If a foreign company is not an employer in India (i.e. it does not have any employees based in India), it is not liable to FBT in India. However, if a foreign company is an employer in India (i.e. it has employees based in India), it will be liable to FBT in respect of the fringe benefits provided or deemed to have been provided within the meaning of section 115WB of the Income tax Act.
9. Whether a foreign company not having any PE in India and doing business promotion through an Event Manager or a Liaison office is liable to FBT?
A foreign company not having any permanent establishment in India and doing business promotion through an event manager or a liaison office would not be liable to the FBT in India if it does not have any employees based in India.
10. Does FBT apply to liaison offices?
FBT will apply to liaison offices of foreign companies in India if the liaison offices have employees based in India.
11. If foreign company has a permanent establishment (PE) in India and it incurs expenditure outside India, which is claimed as a deduction in computing the income of the PE in India, whether FBT would be payable on the expenses incurred outside India?
In a case where a foreign company has a permanent establishment 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.
12. Whether credit for FBT would be available in the foreign country of residence?
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.
13. 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?
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.
14. 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 ears the expenses incurred by the expatriates?
A foreign company deputing personnel to India for short duration under a technical supervision contract is liable to FBT in India if:
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1. The salary, as defined in section 17 of the Income-tax Act, of such employees is liable to income tax in India; or
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2. The company has employees based in India other than those deputed to India for a short duration.
Further, if the foreign company incurs expenditure and claims reimbursement for such expenditure, the foreign company would be liable to FBT on expenditure so incurred for the purposes enumerated in sub-section (2) of section 115WB.
However, if the Indian entity bears the expenses of such personnel deputed by the foreign company and includes those expenses under the appropriate head in clauses (A) to (P) of sub -section (2) of section 115WB, such expenses will be subjected to FBT since it is a presumptive tax.
15. Whether FBT is payable by a foreign company even if its employee (s) are not taxable in terms of the Article relating to dependent personal services in any treaty?
If a foreign company has employees based in India and the remuneration received by all its employees is not taxable in India in terms of the Article relating to dependent personal services in any treaty, such foreign companies would not be liable to FBT in India.
16. What happens if the value of fringe benefits is more than determined on presumptive basis? Will the assessee not be obliged to pay tax on the actual expenditure on fringe benefits?
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 section 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.
17. Whether the deeming provisions of sub -section (2) of section 115WB quantify the fringe benefits referred to in clause (a) of sub -section (1) of section 115WB? If not, how are the benefits referred to in the said clause to be valued?
In terms of the provisions of sub-section (1) of section 115WA, an employer in India is liable to FBT in respect of the value of fringe benefits-
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(a) provided by him to his employees; and
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(b) deemed to have been provided by him to his employees.
The scope of fringe benefits provided or deemed to have been provided is defined in section 115WB. Sub-section (1) of the said section defines the scope of fringe benefits provided by the employer to his employees. Similarly, sub-section (2) of the said section defines the scope of fringe benefits deemed to have been provided by the employer to his employees.
Therefore, sub-section (2) expands the scope of sub -section (1) through a deeming provision.
The provision relating to the computation of the value of the fringe benefits is contained in section 115WC. It is a settled principle of law that where the computation provision 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.
18. 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?
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 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.
19. 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).
Reimbursement of expenditure to an employee is a fringe benefit provided to an employee within the meaning of the 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 clauses (A) to (P) of sub-section (2) of section 115WB and for which the computation is provided in section 115WC.
If computation is not provided in respect of any fringe benefit provided or deemed to have been provided, such benefit is not liable to FBT.
20. Does section 115WB create two classes of fringe benefits under sub-section (1) and (2) i.e., fringe benefits and deemed fringe benefits?
Section 115WB defines 'fringe benefits'. Sub-section (1) refers to the specific fringe benefits provided by the employer to employees, whereas sub -section (2) provides that fringe benefits shall be deemed to have been provided by the employer to his employees if the employer incurs any expense on or makes any payment for the purposes enumerated in clauses (A) to (P).
21. What is the meaning of the word 'purposes' in the term 'for the following purposes' referred to in sub-section (2) of section 115WB?
The word 'purposes' in the term 'for the following purposes' referred to in sub -section (2) of section 115WB refers to the proximate purpose and not the distant purpose.
For example, if expenditure is incurred on travel for discussing an advertisement plan for a product, such expenditure shall be construed to have been incurred for the proximate purpose of traveling and not the ultimate purpose of advertisement and accordingly liable to FBT.
22. If a company incurs expenditure on travelling, hotel etc. wholly and exclusively for executing an assignment for its client and the client reimburses the company for such 'out of pocket' expenses, whether the company would be liable for FBT in respect of such 'out of pocket' expenses?
Since the expenditure on travelling, hotel etc is incurred by the company and not by the client, the company is liable to FBT in respect of such expenditure. However, the client will not be liable to FBT in respect of payment for such expenditure.
23. Whether expenditure incurred by a professional like a lawyer or auditor on conveyance, tour and travel, and reimbursed by the client, is liable to FBT in the hands of the client?
The reimbursement of expenditure incurred for the 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.
24. 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?
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.
25. Whether the expenses need to be segregated into those incurred for official purposes and those for personal purposes?
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 for official purposes and personal purposes.
26. Whether pre-operative expenses falling within the categories specified in section 115WB (2) would be covered in the scope of fringe benefits?
Any expenditure incurred for the purposes referred to in clauses (A) to (P) of subsection (2) of section 115WB is liable to FBT irrespective of whether such expenditure is incurred prior to commencement of the business or thereafter.
27. Whether FBT needs to be shown 'above the line' or 'below the line' in the profit and loss account?
For the purposes of computation of total income under the Income tax Act, FBT is not an allowable deduction under sub -clause (ic) of clause (a) of section 40 of the Income-tax Act.
However, the accounting treatment of FBT for the purposes of reporting to shareholders and complying with the obligations under the Companies Act will be governed by the Accounting Standards issued by the Institute of Chartered Accountants of India.
28. Whether FBT would apply to payment of advance towards expenses to be incurred in the future?
FBT would be payable in the year in which the expenditure is incurred. Therefore, FBT would not be payable on payment of advance towards expenses to be incurred in the future.
29. In a case where the expenses are capitalized and amortized over a period, whether FBT will be payable over the whole of the amount capitalized or restricted to the amount amortized during the year?
FBT is payable in the year in which the expenditure is incurred irrespective of whether the expenditure is capitalized or not. However, the same expenditure will not be liable to FBT again in the year in which it is amortized and charged to profit.
30. Is FBT payable by an Indian company having employees based both in and outside India on its total (global) expenditure incurred by it for the purposes referred to in clauses (A) to (P) of sub-section (2) of section 115WB?
FBT is payable on the value of fringe benefits provided or deemed to have been provided to employees based in India and determined on a presumptive basis in accordance with the provisions of section 115 WC 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 subsection (2) of section 115WB and attributable to the operations in India.
If the company maintains separate books of accounts for its Indian and foreign operations, FBT would be payable on the amount of expenses reflected in the books of accounts 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.
31. 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?
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 employees based in India, such company would not be liable to the FBT in India.
