The Hindu Business Line : How to get around FBT

The Finance Act, 2005 introduced for the first time Fringe Benefit Tax (FBT) on the employer in respect of fringe benefits provided to employees collectively. If what the Finance Minister, Mr P. Chidambaram, said in the Budget speech and what has been legislated in the form of Chapter XII-H in the Income Tax Act, 1961 (Act) are compared, it appears that the draftsmen have exceeded their brief on FBT.

In para 160 of the Budget speech, Mr Chidambaram had said that where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees, they shall be taxed in the hands of the employer.

But from Chapter XII-H it can be noticed that FBT is leviable even in respect of expenses attributable to individual employees (such as contributions to Superannuation Fund) and even those, which have nothing to do with employees (such as entertainment expenses for business, sales promotion expenses, guesthouse and telephone expenses for the business) are being subjected to FBT.

In view of the unreasonableness of this tax, which has emerged as a tax on expenditure in the garb of `additional income-tax', the taxpayers can legitimately think of planning, which eliminates or reduces the impact of this ill-conceived tax for certain expenses.

A legal way to do so could be to form companies with only non-executive directors and no employees.

The CBDT, through Circular No. 8 of 2005, has clarified that companies with no employees will not be liable to FBT.

In view of this, the following arrangements can be made to avoid FBT:

Companies should have only non-executive directors getting only the sitting fees and no fixed remuneration.

They can be reimbursed for the actual expenditure incurred for the purposes of the company.

The Andhra Pradesh High Court, in T. Deen Dayalu vs Sri Bezawada Papi Reddy (1984 2 Comp LJ 396 AP-DB), held that a director is not a manager or any other managerial personnel. It has also been said in Lee vs Lee's Air Farming Ltd (1960 3 All ER 420 PC) that a director is neither an employee nor a servant unless he is working as such in different capacity. In this context, the decision in the Bachan vs Secretary of State for Employment (1997 BCC 145) case, where the relationship of employment was said to not exist can also be seen.

The other issue would be as to how the work of the company can be managed without any employees. This can be done by replacing employees by service providers on retainership basis. This is possible by assigning the work i) relating to accounts to a firm of chartered accountants; ii) relating cash disbursements/receipts, payment of bills, etc., to a bank; iii) security and maintenance of office to an organisation providing such services; iv) transport to a transport firm; v) receipt, dispatch of mails and other connected work to a courier agency; vi) secretarial work and compliances to various statutory laws and rules to an undertaking specialising in such work; and vii) providing legal services and workforce for daily running of office to an organisation, giving such services, etc.

Supervision in regard to efficiency and economy can be done by non-executive directors, who can be reimbursed actual expenses incurred by them in the work relating to supervision.

If no employee is appointed, FBT cannot be imposed because in such cases there will be no employer. The Circular No. 8/2005 dated August 29, 2005, has also clarified that firms having retainer-relationship arrangements and no employees will not be liable to FBT.

If the work of the company is organised in the manner suggested, there would be no FBT liability. Besides freedom from problems relating to employees, work can be managed with more efficiency and economy.

There can be no objection legally in managing affairs in this manner, as it would be within the framework of law.

Justice Rangnath Misra, in McDowell & Co. Ltd. vs CTO (154 ITR 148), said that tax planning can be legitimate if it is within the framework of law. Justice J. C. Shah, in CIT vs A. Raman & Co. (67 ITR 11 at 17), observed that avoidance of tax liability by so arranging commercial affairs so that charge of tax is distributed is not prohibited.

Various other courts in India and abroad have made similar observations. Hence, arranging the working in the manner suggested cannot be objected to by the I-T Department.

(The author is a former CBDT chairman.)