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31 May 2005
No Benefits, Only Tax
It is supposed to be a tax on the employer, but it is the employee who will end up paying it.
Praful Poladia and Ravikant Kamath
page 1 of 1
THE FINANCE minister has turned a deaf ear to industry and has gone on to implement the fringe benefits tax(FBT) with a few minor modifications. To placate those protesting, he gave assurances that ‘legitimate business expenses’ would be spared, but when it came to the crunch, he sparedfew. Whatever changes there are are merely cosmetic. And so it is that employers and employees alike will have to bear the brunt of theFBT, litigation and a host of attendant procedural issues. A look at the provisions of this tax and examine their implications.
Who’s taxed. The FBT provisions apply to all ‘employers’. As a corollary, they can’t apply to a person who did not have any employee even if he had business-related expenses during the year. Individuals and HUFs are not covered, regardless of the size of their business or number of employees. Funds, trusts or institutions eligible for exemption under Section10(23C), or registered under Section12AA, are also outside the FBT net.
Partnership firms and companies–listed, unlisted, foreign etc–fall under the definition of employer. They will be liable to pay FBT regardless of whether or not they are liable to pay tax on their total income. The same holds for sick companies, Section10A/10B entities, and loss-making entities.
Employers will pay FBT of per cent (includes surcharge and educationcess) on the value of the fringe benefit. In effect, employers across industries will incur an additional burden of tax ranging from per cent to per cent on the various expenses incurred by them.
What’s taxed. Expenses that give fringe benefits to an employee have been categorised under two heads: those resulting in direct benefit to employees, and those deemed as fringe benefits. The latter are presumptive benefits, that is, the benefit is presumed even if expenses are not necessarily incurred on the employees.
Direct benefits include the value of privileges, services, facilities or amenities provided/reimbursed to an employee, the value offree/concessional tickets for private journeys of the employee and his family, and contributions to his superannuation fund. The value of these fringe benefits will be considered at 100 per cent of the expense, resulting in an FBT burden of per cent of such expenses.
Thankfully, the employer does not have to pay FBT on perquisites that are, in any case, taxed in employees’ hands. One such expense is housing provided to an employee, whose salary includes the perk value at 20 per cent (as against 10 per cent in the earlier year). An issue that may arise: will the employer have to pay FBT on perks that are tax-exempt in the hands of the employee? These include medical reimbursement up toRs 15,000 per annum, use of the employer’s vehicle for commuting to and fro office and residence, and tax-exempt allowances likeLTA, and conveyance allowance up to Rs 800 per month.
The employer will now pay FBT on some of the perks that were hitherto taxed in the hands of individual employees. These perks include motor car, travel and tour on holiday, credit card, and club expenses. The employer will have to pay FBT at the prescribed rates on such expenses. At first glance, this provision may seem to favour the employees, but as is already becoming apparent, salary structures are being overhauled; perks like car and telephone may now form part of fixed allowances, and hence part of an employee’s regular salary. In effect, the tax burden on the employee will go up, and his take-home will fall.
The ‘deemed fringe benefits’ category is further grouped into business expenses resulting in indirect benefit to employees, and expenses incurred for the collective benefit of employees. The first head includes entertainment, hospitality to any person, conferences, sales promotion (including publicity), employees’ welfare, conveyance, tour and travel (including foreign travel), hotel, boarding and lodging, repair, running (including fuel) and maintenance of cars and aircraft (including depreciation), telephones (includingcellphones), and guest house maintenance. These expenses will be treated as fringe benefits at the rate of 20 per cent, resulting in an FBT burden of 6.7 per cent (including surcharge andcess) on such expenses.
Expenses involving collective benefit to employees include festival celebrations, use of health club and similar facilities, use of any other club facilities, gifts and scholarships. These will be treated as fringe benefits at the rate of 50 per cent, and the rate at which FBT is payable on them is per cent (including surcharge andcess).
Concessions and exclusions. To make sure the FBT axe does not fall upon ‘legitimate business expenses,’ certain exclusions have been provided. Expenses on advertisement, press conferences, business conventions, sponsorship of events, and publication of statutory notices have been excluded from the scope of sales promotion and publicity. Similarly, provision of food and beverages to employees in the office or factory, or through paid non-transferable vouchers usable at eating joints and outlets, are excluded from hospitality expenses. Employers will need to track such expenses under separate heads for administrative convenience.
Certain industry-specific concessions are provided by way of a lower rate of value for FBT (5 per cent). Expense items that will attract the concessional rate are conveyance, tour and travel in the construction, pharma and software industry; hotel, boarding and lodging in pharma and computer software; hospitality in the hotel industry, motor car in the car transport industry, and aircraft expenses in the aviation industry. On such expenses, the effective FBT burden will be per cent.
Sadly, sectors like FMCG, tour and travel, consumer goods, andBPO, which spend heavily on sales promotion, publicity and travel, have not been given any relief.
Procedures. The employer has to pay the FBT as advance tax in four instalments and has to comply with a separate FBT return, assessment, appeal, and reassessment. This, in addition to the procedures for income tax payment. Worse, no provision has been made for a threshold limit. So, even an FBT liability of Re 1 entails compliance in totality. What this means is that employers will have to incur additional expenditure on employing staff for FBT compliance, paperwork, tax consultants and litigation. This also means that the effective cost of FBT will be much higher than the maximum rate of per cent.
An unclear picture. Employers may face a host of controversies on the interpretation of some provisions. For instance, it’s not clear if sales commissions, discounts or provision of free samples will be included under the sales promotion and publicity head. Will the entire food and beverage expense incurred by a hotel be considered as hospitality? Will IT and ITES companies get the concession meant for employers engaged in manufacture and production of computer software? Will book depreciation be considered while calculating the value of the fringe benefit, or will income tax depreciation be considered? Will expenses disallowed in regular scrutiny assessment be excluded from the value of fringe benefits? There are fewanswers.
The authors are members of BombayChartered Accountants’ Society. www.bcasonline.org
Thanks so much for your reply. I really appreciate it. Will definitely help me writing my project.
What I am really finding difficult is getting information form various organisations as to what they are planning to do abt the FBT , as in are they plang to pass it on to the employees or are they willing to absorb the cost etc ?????
Nevertheless thanks for the help.
As most of the companies are following a practice of "Cost to the Company" approach,
- 1. In new recruitment, it is eventually the employee's package that is affected as the company sticks to its "Cost to the Company" and decides the compensation structure accordingly
2. For already existing employees, most of it is been born by the company, through increasing "Cost to the Company" at the same time certain benefits are discontinued and proportionate increase in salary is given. This leads in lower FBT for the companies but higher or more IT for the individual.
i am an mba student,doing a summer project on comensation and rewards in a pharma major.my project also includes the aspects of fbt.
would u kindly guide me on the level of impact the fbt is having on the overall salry stucture and the implications of introducing fbt?
I have a confussion under sales promotion expense (u/s 115WB(2)(c) under FBT. Do the business promotion expenses are included in the sales promotion expense.