The Hindu Business Line : There are contradictions in FBT

THE latest circular on fringe benefit tax (FBT) makes one think hard, trying to analyse and understand the justification and rationale of taxing the various transactions as also the correlation, or rather contradiction, of the expressions at different places.

As for the justification of FBT, the Circular states that "in India, prior to assessment year 1998-99, some perquisites/fringe benefits were included in salary in terms of Section 17 and, accordingly, taxed under Section 15 of the Income-tax Act in the hands of the employee and a large number of fringe benefits were taxed by the employer-based disallowance method where the quantum of the disallowance was estimated on a presumptive basis. In practice, taxation of fringe benefits by the employer-based disallowance method resulted in large-scale litigation on account of ambiguity in defining the tax base."

The next para, on tax base, states "that the tax base for the purposes of FBT is the value of fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year. It is based on a presumptive method applied to certain heads of expenditure as a measure/indicator of fringe benefits."

Thus, the effort, it seems, was never towards eliminating or replacing the unjustified `presumptive method' but to legalise it by defining arbitrary percentages. The `virtue of simplicity and minimum disputes' is achieved by imposing imaginary figures. Is it fair and equitable to charge FBT on the entire expenditure in a particular head irrespective of whether the expense is fully related to the employee(s) or not? The tax itself is a complete parallel to income-tax in process and procedures and, therefore, how it will result in `low compliance cost and less administrative burden' is best known to the Revenue.

Para 2 on `Objective' elaborates on the meaning of `equity' and the need for `economic efficiency' with regard to the taxation of employees under `employer-employee' relationship, making one believe that the proposed tax is purely in the context of this relationship.

It further enumerates that "the Finance Act, 2005 has introduced a new levy, namely, the FBT, as a surrogate tax on employer with the objective of expanding the tax base and maintaining equity between employers" reinforcing such an understanding.

The scope of the term `"fringe benefits provided' is defined in sub-section (1) of Section 115WB to mean any consideration for employment provided by way of..." It further says that there are alternative methods — presumptive and discretionary — to identify such disguised payments to employees.

The scope of the term `fringe benefits deemed to have been provided' is defined in sub-section (2) of Section 115WB. Fringe benefits shall be deemed to have been provided by the employer if he has incurred any expense on, or made payment for, the purposes summarised in the sub-section.

The scope further clarifies that the privilege, service, facility or amenity referred to in sub-section (1) of the said section does not include perquisites in respect of which tax is paid or payable by the employee.

It is also stated that "the tax on fringe benefits is payable by the employer even if he is not liable to pay income-tax on his total income computed in accordance with the provisions of the Income-Tax Act."

Regarding the liability to pay, it is clarified that FBT is payable by a person if he satisfies the following (in the absence of the word `or', the applicability of all conditions is intended) conditions: i) he is an employer; ii) he has employees based in India;...

The answer to Question 2 in the Circular unconditionally states that the `employer-employee' relationship is a pre-requisite for the levy of FBT. An entity which does not have any employee on its rolls (answer to Question 3) will not be liable to FBT. In terms of sub-section (1) of Section 115WA (answer to Question 7), an employer in India is liable to FBT in respect of the value of fringe benefits provided, and deemed to have been provided, by him to his employees.

Section 115WB (answer to Question 10) 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).

However, this understanding of the tax `purely in the context of the employer-employee relationship' gets less clear as one delves further into Circular. And there appears to be much potential for large-scale litigation on account of ambiguity in defining the tax base, something which was supposed to have been corrected.

If the tax is intended on the prescribed entities without `employer-employee' relationship, then all that has been stated becomes irrelevant and the Circular, illogical.

Deeming that an expense, just because it belongs to a particular specified head of expense, will be considered to have been incurred on employee(s) and thus a fringe benefit is irrational. If this was the intention of the legislation, then probably there was no need to create one more law on taxation. Instead, it could have been provided that the expense under specified heads would be disallowed at given percentages. The purpose would have been achieved under the earlier disallowance method itself and the so-called ambiguity would have been eliminated.

The tax base relating to FBT, it is clarified (answer to Question 6), 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 presumptive basis is of no consequence/relevance.

This provision results in distorted incidence of tax and goes against the spirit of maintaining equity among employers.

The answer to Question 7 states that 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.

The answer to Question 9 also states that reimbursement of expenditure to an employee is a fringe benefit provided to an employee within the meaning of clause (a) of sub-section (1) of Section 115WB. However, 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.

What is the implication of Section 115WB(1)(a) in the light of this clarification? Does it not make the clause irrelevant?

The answer to Question 11 states that 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 travelling and not the ultimate purpose of advertisement and, accordingly, liable to FBT.

Such explanation is highly subjective and the provision allows for different interpretation. Would it not be a cause for dispute which FBT was meant to eliminate?

(The author is partner in Toshniwal & Associates — Chartered Accountants.)

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