Getting into the core of fringe benefit tax

The imposition of fringe benefit tax, which proposes to tax companies on perquisites provided to their employees, by Finance Minister P Chidambaram in his Budget has sparked off a huge debate amongst corporate and tax circles.

Fringe benefits are benefits, which employees or directors receive from their employment but which are not included in their salary cheque or wages. On the tax return form they are called 'benefits in kind'.  Let me share a few basic concepts on fringe benefit tax.

What is this tax? Fringe benefits shall be deemed to have been provided if the employer has incurred any expense or made any payment for various purposes. (See table below)

The value of fringe benefits shall be 5 per cent , as against 20 per cent of the expenses incurred in the case of an employer engaged in the business of: hotel, construction,  manufacture of pharmaceuticals, and software firns.

Please note: It will be nil as against 20 per cent of the expenses in case engaged in business of carriage of passengers or goods by aircraft.

There are few exemptions in this regards in the following categories:

Employee: An entity, which does not have any employee on its rolls.

Status: A company registered u/s 25 of the Companies Act if its income is exempt u/s 10(23) Or such company registered u/s 12AA Income tax.

Employee stock options: Benefit provided by the employer to the employees by way of allotment of shares, debentures, or warrants directly or indirectly under any employee stock option plan.

Location: 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.

Foreign company: A foreign company not having any permanent establishment in India and doing business promotion through an event manager or a liaison office not liable to FBT. If it does not have any employee based in India.

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. 

Net of expenses: Where the employer recovers from its employees, any amount of expenditure incurred for the purposes listed in clauses (A) to (P) of sub -section (2) of section 115WB, the value of the fringe benefits shall be determined with reference to the net expenditure and not gross expenditure.

Personal expenses: Accordingly, any expenditure that is incurred for personal purposes is not allowable as deduction. Sub -section (2) of section 115 WB provides for a levy on fringe benefits estimated on a presumptive basis using certain expenses as a measure.

To the extent the expenses incurred by the employer are personal in nature and have, therefore, been disallowed under section 37 of the Income-tax Act, such disallowance would not be liable to FBT.

Perquisite in salary: The perquisites in the nature of accommodation taken on lease or rent by the employer is neither contribution to an approved superannuation fund nor represent the cost of free and confessional tickets for private journeys of employees or their family members.

Such perquisites fall 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.

Training centre: 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.

Food at office: At times, employees order for food and beverages in the office premises while working after office hours is exempt.

Food vouchers: 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.

Incentives on sales: 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 do not fall within the scope of clause (D) of subsection (2) of section 115WB and, therefore, not liable to FBT.

Call centre: Any expenditure in the nature of call centre charges for canvassing sales (cold calls) and carrying out post-sale activities is in the nature of selling cost and therefore, outside the scope of the provisions of clause (D) of sub-section (2) of section 115WB relating to sales promotion. Accordingly, such expenditure is not liable to FBT.

Pay 'n' perks

• Percentage of expense under the fringe benefit tax
• Any free or confessional ticket provided by the employer for private journeys of his employees or their family members
• Rates: Cost at which provided minus the amount recovered by the employee
• Contribution by the employer to an approved superannuation fund for employees
• Rates: In excess of Rs 1,00,000 per employee
• Use of telephone (other than leased lines), Entertainment, Hospitality, Maintenance of accommodation like guest houses, Conference, Employee welfare, Sales promotion, including publicity, Conveyance, tour and travel, including foreign travel, Hotel, boarding and lodging, Repair, running (including fuel), maintenance of motorcars and depreciation thereon, Repair, running (including fuel), maintenance of aircraft and depreciation thereon

Rate: 20%

Scholarship to children of employees, Festival celebration, Gifts, Use of club facilities, Use of health clubs, sports and similar facilities

Rate: 50%

The writer is head-financial planning at Sykes & Ray Equities