The enactment of the fringe benefits tax (FBT) along with the banking cash transaction tax has been an unprecedented exercise for various reasons capped by Circular No. 8 of 2005 dated August 29, 2005 (see [2005] 277 ITR (St.) 20). One may examine what is unusual about FBT in the statute as well as the above circular.

The budget proposing levy of tax on fringe benefits in the form in which it was proposed was already accompanied by amendment to rule 3 of the Income-tax Rules, 1962 dispensing with levies on certain perquisites taxable under rule 3 in preparation for the shift of liability to the employer by publication of the amendment to the rule by Notification No. S. O. 265(E) dated February 28, 2005 (see [2005] 273 ITR (St.) 234, on the day the budget was presented. This notification takes for granted that the new levy would be upheld by Parliament, so that if it had not been approved, it would have been necessary to restore the original rule. Rules are notified by the Central Board of Direct Taxes, while the law is framed by Parliament. It is unusual for the Board to amend the rule in anticipation of Parliamentary approval of the Bill.

Again the question would arise is the reason why fringe benefits which are identified and taxed by amendment to section 17(2) with effect from the assessment year 2002-2003 should be substituted by a less precise method of ad hoc valuation.

The definition of "employer" in the Bill was identical with the definition of "person" under section 2(31) except for the condition in the case of individuals and Hindu undivided families (HUF), that they had to have business income, so that for other entities even this was not necessary. Charitable institutions were also liable in the Bill. But this definition had to yield to representation, so that when the Bill became law, individuals and Hindu undivided families were totally excluded, while charitable institutions registered under section 12AA or eligible for exemption under section 10(23C) were excluded from the definition of employer, though they may have a large army of employees, while for others, there was not even any requirement that they should be employers, a most unusual definition of employer.

Even after the amendment at the Bill stage, the definition of "employer" had the anomaly that all entities whether firms, companies, or associations of persons (AOP)/ bodies of individuals (BOI) were treated as employers without any employee. The absurdity of such a sweeping definition to treat a person as an employer, whether it had an employee or not and the constitutional vulnerability as to the validity of the levy itself was realised, so that the circular conceded that an "employer" without any employee will not be liable for FBT, since the employer-employee relationship is a prerequisite for the levy of FBT (Q.2) with an example of a law firm with a retainer relationship arrangements, a rare species of professionals indeed. It follows that a single employee may make all the difference to liability. At any rate, an Indian company with activities abroad without any employee is not liable for FBT (Q.21). If there be a pre-condition of an employer-employee relationship, why not recognise such condition in respect of expenses listed under section 115WB(2) by leaving out any class of expenditure for which there is no benefit to any employee ?

There could be liability at 100% for expenditure under section 115WB(1), 50% or 20% under section 115WB(2) and nil per cent., if it does not fall under any of the two sub-sections, with 5% for certain industries for certain classes of expenses. These rates have been fixed without any study or consultation. There are many deeming provisions under the statute but such arbitrary and ad hoc deeming probably is unprecedented and unusual.

Real fringe benefits admittedly are not the real target. The professed objective is to tax fringe benefits enjoyed by the employees which presently go untaxed. But in answer to Q.6, it is conceded that the real fringe benefits may be more or less and that such real fringe benefits are of no consequence or relevance for purposes of FBT. This is an inference which strikes at the very root of the levy and the very justification for the tax. The real income concept is accepted in taxation of income. It follows that real fringe benefits alone should be taxable. There can be nil fringe benefits as are found in many items falling under (A) to (P). There is no precedent whatsoever for presuming something where there is nothing. Actual fringe benefits, as conceded by the circular, need not even be relevant, an odd interpretation for a tax purportedly on fringe benefits.

Section 115WB(2) has to be read with section 115WC. The latter section prescribes the percentages of presumptive income for each classification with the percentage reduced for certain classifications for specified industries, so that section 115WC is treated by the circular as a machinery section for items covered in (A) to (P) of section 115WB(2). It is assumed that there is no such machinery section for fringe benefits falling under 115WB(1). This assumption is made for leaving out some direct benefits, which may be prima facie taxable, but all the same, it would be absurd to make them liable for FBT or against State policy. The odd explanation for this reasonable inference is found in the answer to Q.7, which reads as under :

It is admitted that certain benefits which are described under section 115WB(1)(a) being "any privilege, service, facility or amenity given directly or indirectly or whether given by reimbursement or otherwise" may be chargeable in view of the plain language of the provision, which clearly identifies liability, but it is proposed to leave them out, because there is no machinery section for computing the value of these benefits. It is really not correct to infer that there is no machinery section, because section 115WB(3) provides for computation of fringe benefits taxable under section 115WB(1)(a) by reducing the amount falling under section 115WB(1) by the amount on which tax is paid by the employees in respect of such benefits covered.

But then, a solution had to be found for leaving out certain items, which are consciously exempt or would have met with resistance, because of the enormous additional burden, they would have otherwise created. Such solution is found by faulting the legislation itself for failing to provide machinery section, an argument usually addressed by tax lawyers to question a levy. But such an argument is usually not entertained, because the courts do not accept that legislative intent can be so by-passed. It is unusual that the Board should come out with the criticism of legal drafting as missing the target. But then, the taxpayer can have no complaint, because it is on the basis of this reasoning, that the employer’s contributions to provident fund and gratuity fund, concessions as for employees stock option schemes, reimbursement of expenses incurred by an employee for business nature etc., have all been accepted as not liable for FBT, though they squarely fall under section 115WB(1)(a).

In answer to Q.9, it is repeated that FBT is payable only where any expenditure is incurred for purposes listed in clauses (A) to (P) of section 115WB(2). If this were the interpretation to be accepted, there would never be an occasion for invoking section 115WB(1)(a). At any rate, it is most unusual for the creature of a legislation itself to question the effectiveness of the legislation.

Though FBT is a separate tax with both levy and computation being independent of each other as in the case of Minimum Alternate Tax (MAT), linking up has not been ruled out in the circular, where such non-linking leads to absurd results. In answer to Q.35 and 36, amounts disallowed in income computation either as income of personal nature under section 37 or as bogus expenditure, it is conceded, will not be subject to FBT. It also concedes that capital expenditure would not come within the scope of FBT, but capitalised expenditure can be liable in its entirety and not what is charged during the year. All these would mean that the liability is not limited to what is booked under items (A) to (P). Hence, computation of FBT liability cannot be entirely delinked from computation of income for income-tax purposes, an admixture necessitating the computation of income for income-tax purposes before FBT liability is determined.

Foreign companies with employees based in India will be liable for FBT (Q.25). If a foreign company has a permanent establishment in India, it will be liable "irrespective of whether the expenditure attributable to the operations of permanent establishment are incurred in India or outside India". Classification of expenditure of the foreign company as between items (A) to (P) and further classification of what is incurred in India and outside India will not be easy. There is similar difficulty in categorising the expenses as between (A) to (P) in a similar case of Indian company having business in India and abroad with employees stationed abroad. The solution offered in such cases probably expected even for foreign companies again is not easy. If separate accounts are kept, such accounts will be the basis. If no such accounts are kept, the circular would require global expenditure proportionate to Indian operations to be liable for FBT. While no guidance is available in the statute for computation of liability in such cases, the argument that the charging section fails for lack of computation provisions is apparently not acceptable to the tax administration in such cases.

Clarification of items covered by sales promotion expenses exhibits lack of consistency of approach as in other such matters. While the statute under section 115WB(2)(D) excludes expenditure on advertisement in any form in print, sponsorships of sports, hoardings, etc., celebrity endorsement will not qualify for exclusion on the curious reasoning that it is for use of brand so as not to be excluded. Brand-building is the object of most advertisements, so that this could not be the reason. If celebrity could be successfully associated for sports sponsorship, why should it be barred for legitimate advertising ?

Brokerage and selling commission, bonus points for credit card customers, incentives for meeting quantity targets and marketing research expenses are excluded from liability, but freebies or products to customers, distribution of samples and quantity discount and adjustable cash incentives against future purchases (Q.61) are made liable for FBT for reasons which are not apparent. Both Central excise and sales tax precedents will rule that any disbursement on commitment made at the time of sales would be an abatement of price. In the case of call centres, calls for canvassing sales (cold calls) will not be liable, but other calls will be liable involving a bifurcation, which is well nigh impossible except perhaps at significant cost of compliance.

Free medical supplies to doctors, an important source of advertisement for the pharmaceutical industry will be liable for FBT for the peculiar reason that the Supreme Court in Eskayef v. CIT [2000] 245 ITR 116 had treated it as sales promotion under section 37(3A) (now deleted), which placed a ceiling on such expenses. The Supreme Court treated it as advertisement only because there was no finding in the case before it as in CIT v. J & J Dechane Laboratories (P) Ltd. [1996] 222 ITR 11 (AP), where that expenditure was shown to have been incurred for finding the efficacy of the drug, so that it follows that where the distribution is to get feedback from doctors, the Supreme Court decision can have no application. Most distribution by the industry to the doctors is also to get a feedback, which is most useful for improvement of the product. The instruction as to what constitutes FBT and what does not, bristles with inconsistencies under this head as under other heads.

It is conceded that leave travel concession, transport allowance, children’s education allowance and house rent allowance are excluded either because they fall under rule 2BB or are treated as perquisite under section 17 as salary. Both sections 17 and items which fall under section 10(14) read with rule 2BB need not necessarily be the subject-matter of the same treatment, both for income computation and classification of expenditure for accounting purposes. As for example, the benefit of free transport for the employees to attend office may come under conveyance or such other expenses and not necessarily fall under the head salaries and wages. Medical reimbursement, whether taxable or not, falls under the head salary, so that it should be exempt from FBT on this reasoning. The answer to Q.69 would suggest that what is taxed only will be left out of FBT. Such expenses will have to be split up as between taxable and not taxable expenses as in the case of medical reimbursement. Uniforms exempt under rule 2BB may however not be liable for FBT only where they are statutorily required. There are similar inconsistencies under other items but only some of the unusual aspects of this tax are highlighted here.

The manner in which the income is classified as between items covered by each class of expenditure in (A) to (P) of section 115WB(2) will have effect on the incidence of tax. The classification is often overlapping. There are no guidelines thus far from the statute in this regard. In answer to Q.42, the circular states that there are no special requirements of accounting records under FBT. It further states as under :

The circular, however, does not say whether such accounting standards will be binding on the Revenue as a part of delegated legislation. It cannot obviously be treated as binding in any manner, because the Board itself does not have the power to delegate the function of issuing instructions under section 119, except where it is authorised by the statute. It is a basic principle of law, that delegated power cannot be further delegated on the principle delegatus non potest delegarie. Since liability for FBT depends upon classification, the Board has no answer for this important aspect of FBT.

The circular while removing the apprehension regarding liabilities as regards some major items like gratuity and provident fund contributions and all statutory liabilities, has in all other matters served the purpose of creating more confusion on the subject, mainly because the reasoning for either inclusion or exclusion is often self-contradictory. Further in leaving the liability to be decided on the basis of classification of expenditure for which no guidelines are available, the law as well as the circular has left scope for controversy. This law will take a long time to settle down and by that time, hopefully it will be realised that this levy itself is unduly burdensome for the taxpayer besides enhancing the cost of compliance due to its complexity. The tax administration itself would get enmeshed in interpretation of law, check of classification of expenditure in accounts in search of items liable for FBT included under unlikely heads and bifurcation of some expenditure as between what is liable for FBT and what is not, diverting the time of the Assessing Officers from the more important task of tackling evasion of tax.