The Hindu Business Line : Hair-splitting over hospitality

One is with regard to the most fundamental creature comforts — the way to a man's heart is through his stomach. On 20 per cent of the hospitality expenses incurred by an employer, FBT is payable.

But it has been clarified by the Section dealing with this aspect that hospitality does not include expenditure on or payment for food/beverages provided by the employer to his employee in office or factory.

This exemption though flattering to the employer may not be so to his employee given the fact that by a subsequent provision in the regime governing FBT it has been made categorical that FBT shall not be leviable in respect of perquisites on which tax is paid or payable by the employee under Chapter IV.

The implication of this is, tax will have to be paid by the employee on food and beverage offered to him in terms of the applicable rule.

As per rule 3(7)(iii), free meals to employees provided during office hours are taxable if the value is more than Rs 50 per meal. It would have been so much better had the employer been called upon to pay FBT on the entire hospitality expenses.

First, the raison d'etre of FBT admittedly is to target benefits to employees which are at present escaping tax.

By freeing employees from its clutches, the regime ironically does the opposite by training its guns solely on outsiders such as suppliers and customers who may enjoy a business's hospitality.

Second, having spared the employer from FBT on this count, the Assessing Officer is bound to enforce the aforesaid Rule 3(7)(iii) strictly so that tax is paid by the employee on a benefit which enjoys exemption at the employer's hands. And over-zealousness, as everyone knows, leads to hair splitting.

What is the evidence that the beneficiary of employer's munificence was an outsider and not the employee? What is the evidence that the employer did not spend more than Rs 50 per meal?

These and other niggling questions would have to be answered wasting precious time of the employer.

Perhaps it would be in his interest as well if only to escape harassment that FBT is imposed on hospitality to employee as well.

While on FBT, it would be useful to analyse sub-section (3) of Section 115WA, which reads as follows:

"For the purpose of sub-section (1), the privilege, service, facility or amenity does not include perquisite in respect of which tax is paid or payable by the employer under Chapter IV or any benefit or amenity in the nature of free or subsidised transport or any such allowance provided by the employer to its employees for journeys by the employees from their residence to the place of work or from such place of work to the place of residence."

The way this section is couched, one gets the unmistakable impression that primacy is being accorded to the existing regime and FBT comes into the picture only when the existing regime is remiss in sparing a benefit from the clutches of taxation.

But, in practice, the existing regime must yield to that of FBT lest there is a double taxation because while the FBT regime is enshrined in the Income-tax Act, the existing regime on taxation of perquisites in the hands of employees is contained in income-tax rules made by the CBDT.

Thus, Rule 3 must be so framed that it does not impose a tax on employees in respect of benefits, which are already subject to FBT.

It must be noted that the exemption to expenditure on transport from residence to office and back is only with respect to FBT.

This should not be construed as complete reprieve from taxation.

Employees will have to pay tax on transport allowance if it is in excess of Rs 800 per month.

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

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