After a long wait finally the Explanatory Notes on the provisions relating to fringe benefit tax have arrived. Whether these notes provide relief or benefit to the taxpayer or otherwise is to be seen by reference to each point of doubt. However, the doubts relating to taxation of fringe benefit have now been clarified in a very exhaustive Circular No. 8 of 2005 dated August 29, 2005 ([2005 277 ITR (St.) 20) issued by the Central Board of Direct Taxes, New Delhi. In this article an attempt is made to highlight this very exhaustive Central Board of Direct Taxes circular as far as it relates to the fringe benefit tax vis-a-vis the salaried employee.

In all there are 107 frequently asked questions (FAQs) which are answered through this circular in 40 pages. The FAQs, which have direct bearing on the salaried employees give clarifications which will help the HR Departments of organizations to finally restructure the salary package of the employees keeping in view the tax liability arising as a result of fringe benefit tax (FBT).

In the first place the answer to question No. 3 clearly states that an entity, which does not have an employee on its payroll, will not be liable to FBT. Similarly, it is clarified in yet another question that 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.

The doubt relating to applicability or otherwise of fringe benefit tax in respect of any benefit provided by the employer to its employees by way of allotment of shares etc., has been resolved through the answer provided in question No. 8. It is clearly mentioned in the answer to question No. 8 that 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.

It is clarified in the answer to question No. 9 that reimbursement of expenditure to an employee will be fringe benefit only in respect of reimbursement, which are for the purposes of section 115WB. Thus the items of reimbursement which are not mentioned in the said section will fall outside the purview of fringe benefit tax.

A question arises in the minds of the taxpayer whether FBT would be applicable in the case of an Indian company having employees based both in India and outside India on its global expenditure incurred for the deemed items as mentioned in section 115WB(2). This issue had been clarified by the Central Board of Direct Taxes and in doing so the Central Board of Direct Taxes has opined that 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 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.

Similarly, it is clarified that if an Indian company carried on business outside India but does not have any employees based in India such company would not be liable to FBT in India. However, the provisions relating to FBT will apply to all foreign companies if they have employees based in India. Likewise 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 respect of the fringe benefits provided or deemed to have been provided within the meaning of section 115WB of the Income-tax Act, 1961. All the liaison offices of foreign companies operating in India would also be subject to FBT if they have employees based in India.

While answering question No. 32 the Central Board of Direct Taxes has informed their view point in respect of levy of FBT on gross expenditure and the net expenditure incurred by the employer. In reply to question No. 32 it is clearly mentioned that 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 fringe benefits shall be determined with reference to the net expenditure and not gross expenditure. For example, if an employer incurs 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).

Hundred per cent. expenditure in respect of free or concessional ticket provided by the employer for private journeys of his employees would be treated as a fringe benefit only in respect of employers engaged in carriage of passengers or goods or to the agents of such employers. For other employers only 20% of this expenditure would be treated as a fringe benefit.

Contribution to approved gratuity funds or provident funds would be outside the levy of fringe benefit tax says answer to question number 38. However, the Central Board of Direct Taxes circular is silent on applicability of FBT in respect of group personal accident/workman compensation insurance. It only states that only if the expenditure is a part of statutory obligation it would be exempted. Similar would also be the situation with regard to group health insurance, group medical insurance, group life insurance. We feel that all these payments are not a part of statutory obligation hence they would be subjected to FBT. However, the ESI contribution would be outside the purview of FBT because it is a statutory obligation.

The issue relating to the liability to FBT or otherwise has been put to rest by the answer provided in Q. 44 of the Central Board of Direct Taxes circular. It is mentioned in the said reply that the value of any travel concession or assistance received by an employee normally falls within the meaning 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.

In reply to Question No. 47 the Central Board of Direct Taxes has opined that the allowances of the nature referred to in sub-clause (ii) of clause (14) of section 10 fall outside the scope of FBT. Thus, all allowances mentioned in rule 2BB(2) would be exempted from the purview of FBT. The important allowances that would now be exempted from fringe benefit tax would be certain special compensatory allowances, transport allowance, children education allowance and children hostel allowance.

In respect of FBT on leased accommodation the Central Board of Direct Taxes has clarified its stand that perquisites in the nature of accommodation taken on lease or rent by the employer are neither contribution to an approved superannuation fund nor represent the cost of free and concessional 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. 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. Thus there will be no FBT in respect of expenses incurred on leased accommodation. However, when the question comes of FBT on expenses incurred in respect of owned premises the views of the Central Board of Direct Taxes are altogether different. Giving their view point the Central Board of Direct Taxes in the said circular has clearly stated that any expenditure incurred for the provision of facilities like garden, site cleaning, light decoration, school, library, mess, television, cable connection etc. in employees’ colonies is for the purposes of promoting employee welfare. Therefore, such expenditure falls within the scope of clause (E) of sub-section (2) of section 115WB relating to employees’ welfare and accordingly liable to FBT.

Any expenditure incurred by the employer on payment made through paid vouchers which are not transferable and used only at eating joints or outlets are not liable to FBT. There is no upper limit for granting food vouchers to the employees. Thus food passes issued by Ticket Restaurant, Sodexo or any other company would not be subjected to FBT.

Medical reimbursement up to Rs. 15,000 per annum would be subjected to FBT. However over and above this sum it would not be subjected to FBT. While explaining the logic the Central Board of Direct Taxes has clarified that at present, if any sum is paid by the employer for expenditure actually incurred by the employee for medical treatment in an unapproved hospital and it exceeds Rs. 15,000 during the year, such sum is "salary" as defined in clause (1) of section 17 of the Income-tax Act and liable to income-tax in the hands of the employee. There is no change in this position. Since such sum is taxable in the hands of the employee, the same is not liable to FBT.

However, if any sum is paid by the employer for expenditure actually incurred by the employee for medical treatment in an unapproved hospital and does not exceed Rs. 15,000 during the year, such sum does not fall within the meaning of "salary" as defined in clause (1) of section 17 of the Income-tax Act and not liable to income-tax in the hands of the employee. There is no change in this position. Since such sum is not taxable in the hands of the employee, the same is liable to FBT. The Central Board of Direct Taxes has further clarified that expenditure incurred at hospital/dispensary not maintained by employer in respect of injuries during the course of employment would be subjected to FBT except where it is a statutory obligation.

Any reimbursement of expenditure on books and periodicals to employees the Central Board of Direct Taxes feels is in the nature of expenditure for the purposes of employee welfare and accordingly would be subjected to FBT.

The Central Board of Direct Taxes has opined in Circular No. 8 that 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 and thus not taxed in the hands of the employee. However, since the expenditure for such reimbursement is for the purposes referred to in clause (F) of sub-section (2) of section 115WB relating to conveyances, tour and travel and is liable to FBT.

Question 79 speaks about FBT in respect of per-diem allowances. The answer to this question would be found very interesting to salaried employees. Question 79 states that 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 ? In reply to this question the Central Board of Direct Taxes states that 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 employee will not be liable to pay income-tax on any surplus accruing to him from such allowance. The best part of this answer is that the surplus from such allowance, very clearly states Central Board of Direct Taxes circular, would not be liable to tax in the hands of the employees. The question which remains to be answered is whether the Government would extend the same relaxation to other allowances as per rule 2BB(1) ?

Various other points have been clarified which have far-reaching impact on taxation of salary income viz-a-viz fringe benefit tax. The following is a summary of other important points relating to applicability or otherwise of FBT :

1. Subsidy to school meant for employees’ children liable to FBT.

2. Expenditure on safety shoes or uniforms or equipment to employees or reimbursement of washing charges would not be subject to FBT only if they fall within the ambit of statutory obligations, otherwise FBT applicable.

3. Expenses incurred on prizes/rewards to employees is employee welfare expenditure and thus subjected to FBT.

4. Expenditure on transportation facility for school children of the employees is liable to FBT.

5. Rent on hiring or leasing of motor-cars is subjected to FBT. Interest on loan taken for purchase of cars, is also subjected to FBT.

6. Salary of motor car driver as also the pilot of the aircraft are subjected to FBT. The rent paid for garages or parking slots also subjected to FBT.

7. FBT applicable on use of telephones including mobile phones whether the telephone is in the name of the company or not.

8. Rent of guest house and all expenditure on holiday homes are subjected to FBT. Expenses on food at guest house and contract charges paid to guest house staff are liable to FBT. However, depreciation on guest house building not subjected to FBT.

9. Expenditure on meetings/get-togethers of employees and their family members on the occasion of festival would be subjected to FBT. However, expenditure on Independence Day and Republic Day will not be liable to FBT.

10. Gifts to employees on marriage or otherwise would be treated as "Gifts" and thus 50% of the expenses be treated as fringe benefit and subjected to FBT.

11. Education expenses of employees sent to educational institutions would be treated as scholarship expenditure and thus subjected to FBT on 50% of such expenditure. Scholarship granted to employee or his relative or any other person would be subjected to FBT.

12. No FBT on free or subsidized transport for journeys of the employees from their residence to the place of work.

All the above-mentioned points must be kept in mind while framing the computation of tax liability in respect of fringe benefit.