The Hindu Business Line : Rough ride on the FBT road

EVEN as employers have reconciled to paying fringe benefit tax (FBT) and forked out the first instalment, the much awaited Central Board of Direct Taxes (CBDT) circular clarifying the hazy areas of this controversial provision is yet to be released.

FBT has pushed up the effective corporate tax rate by 1-2 per cent, and India Inc. is taking comfort in this piece of statistic rather than question the legality of FBT.

It is also quite disheartening that the premier accounting body, the Institute of Chartered Accountants of India (ICAI), has refrained from dealing with interpretation issues on the subject, and has merely indicated that disclosure of FBT will be treated as a tax expense not forming part of administrative overheads.

Disclosure is the least of the problem for companies. The real issues are how one deals with discounts and commissions, business travel and various other business-oriented payments having no benefit to any employee. One of the deemed fringe benefits liable to FBT is "repair, running (including fuel), maintenance of motorcars and the depreciation thereon."

Car maintenance

Providing car and driver is one of the key perquisites. Rule 3 of the Income-tax Rules had advocated an ad hoc payment of Rs 1,200/1,600, wherever a car is provided by the employer and used partly for business and personal purposes. Employees, by and large, were quite comfortable paying the perquisite on this facility which they were anyway enjoying partly for personal purposes.

Effective April 1, 2005, the perquisite on motorcars has been dispensed with and only companies providing this facility will now on be exposed to FBT at 20 per cent on the value of fringe benefit. A concession is given in the case of an employer engaged in the business of carriage of passengers/goods by car. In such cases, the value of fringe benefit is 5 per cent.

What makes up motorcar maintenance is a matter of detail. By and large, these include repairs, petrol, replacement of parts, road taxes, insurance and depreciation thereon.

Running and maintenance

Basically cars run on petrol/diesel and maintenance of these should primarily relate to expenses that make it operational and roadworthy. These expenses legitimately will be exposed to FBT at 20 per cent of the value. Depreciation has to be provided on motorcar and the question here is whether one has to take book or income-tax depreciation.

The structure of FBT requires extraction of the items from trial balance and as presented in the books of accounts.

A company has provided depreciation in the books on quarterly/half-yearly/annual basis depending on the regulation under which it is required to do so. The FBT provisions do not indicate the method of depreciation but one can take the stand that in the absence of a clear direction and considering the fact that other items liable for FBT as based on the books of accounts, depreciation also has to be in accordance with what is charged in the books of accounts.

Ironically, for income-tax purposes, the depreciation on the motorcar will operate independently and has no nexus to FBT provisions.

The other issue is whether one should include insurance and driver's salary as part of maintenance of cars. Insurance is mandatory before a vehicle is registered and put on road.

Section 146 of the Motor Vehicles Act, 1988 mandates the need for insurance against third party risk. Further, Rule 47 of the Central Motor Rules, 1989 requires the application for registration of a motor vehicle to be accompanied by a valid insurance certificate. But then, though illegal, a car can run and be maintained without insurance. Similarly, amounts paid as salary to drivers have nothing to do with running and maintenance of a car per se. In the absence of a clarification on this matter, one can take the stand that insurance and driver's salary are not liable for FBT.

Motorcar vs motor vehicle

The language employed in the provisions of fringe benefit is motorcar and not motor vehicle. The term "motor vehicle" is wider in context and application. Hence one should pay FBT only on motorcars and not buses, coaches, trucks, tempos, three- wheelers, two-wheelers, motorcycles scooters, lorries and so on. These do not come under the category of motorcars but under the broad category of motor vehicles. There is a need to capture information on each type of vehicle in the financial system to ensure correct reflection of the amounts liable for FBT.

Issues such as maintenance of motorcar may appear trivial. Each of the items coming under the category of deemed fringe benefit lends itself to several interpretation, leaving employers confused.

Despite the lack of clarity on the subject, advance tax is paid because of the fear of 1 per cent per month interest liability. Board circulars will help in decision-making, but only if they are issued on time — not after the first instalment is paid, as in the instant case.

Most employers seems to have taken their own decisions based on the provisions of law and, wherever possible, drawing support from court decisions which were rendered in the context of the earlier disallowance provisions.

One only hopes that before the next instalment is paid, more light is thrown on the components on which employers are liable for FBT.

(The author is a Chennai-based chartered accountant.)

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