The Hindu Business Line : Reading between FBT lines

Any free or concessional ticket provided by the employer for private journeys of his employees or their family members is specifically brought under the ambit of the Fringe Benefit Tax (FBT) vide Section 115WB(1)(b).

Does this mean that the leave travel concession (LTC) benefit, exempt from tax in terms of Section 10(5) read with rule 2B in the hands of an employee, would be subjected to FBT in the hands of his employer given the fact that Section 115WB (3) bails out from its clutches only those perquisites on which tax is paid or payable by the employee?

The same ambiguity bedevils medical benefits exempt in terms of the proviso under Section 17(2). In the absence of clarity on the issue, the assessing officer (AO) could well ask an employer to cough up a 33.99 per cent FBT on LTC benefits as well as on hospital expenses on employees and their families irrespective, in either case, of whether they make the grade for exemption in the hands of the employees.

Legislative intent

In short, Parliament must clear up this issue, that is: Is it the intention that every employee-related expense be taxed either in the hands of the employee or in the hands of his employer by way of FBT? Or is it that those benefits and perks which have been specifically exempted from tax in the hands of employees are outside the reach of FBT?

If the latter is the legislative intent, it must be brought out clearly in Section 115WB (3). Those which do not make the grade for exemption of course would invite a 33.99 per cent FBT.

To wit, if the employer reimburses medical bills of chemists to the tune of, say, Rs 20,000, FBT ought to be levied only on Rs 5,000 being the excess over the maximum exempt from tax, which is Rs 15,000.

One is at a loss to fathom the true import targeting sales promotion expenses, which by no stretch of imagination gives the remotest benefit to any employee. If an FMCG company for example gives a gold coin or some other prize to the winners of any contest, 20 per cent of such prize money would be exigible to FBT. Be that as it may.

While sales promotion expenses have been targeted for FBT, its subset, advertisement expenses, has been bailed out practically completely, except to the extent such expenses relate to payments to models of ill-repute.

Yes, payments to persons of repute for promoting the sale of goods or services have been specifically saved from the clutches of FBT.

Open to debate

Now this opens the field for a fierce debate as to who is a person of repute and who is not. Of course the intention is to bail out payments to celebrities but the draftsman has floundered yet again. While 20 per cent of sales promotion expenses excluding practically those on advertisement are hit by FBT, 50 per cent of expenses on gifts are so hit. All gifts irrespective of to whom it is given are apparently covered by this regime. In the event, this once again opens the field for protracted litigation — will a gold coin put inside a packet be treated as sales promotion expenses or gift?

This hair-splitting would become inevitable given the difference in the percentage of expenses targeted. When no skills are involved, apparently the giveaway is a gift and not prize. It is another matter though that FBT ought not to be imposed in either case given the rationale of FBT— to bring into the tax net common expenses on employees that defy taxation in their individual hands.

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