Fringe benefit tax is here to stay, and for long

There can be no doubt that fringe benefit tax ( FBT) is here to stay, and for a long time. Circular No 8/2005 put to rest any lingering doubts industry may have had about second thoughts on this levy.

However, a detailed look into the frequently asked questions (FAQs) gives some breathing space to companies to indulge in some tax planning.

To the question as to whether employee stock option schemes (ESOPS) will come under FBT, the answer is in the negative due to valuation issues. Valuation of a stock forms the essence of any ESOP scheme, both at the time of grant as well as exercise.

The Black-Scholes model has stabilised the valuation method to be followed. Companies could sanction some schemes quickly before a way is found out to value ESOPS for the purposes of FBT. It is a normal practice for companies to call employees and their families for a get-together once or twice in a year.

However, FBT provisions must have forced them to ask employees to fend for themselves as far as food was concerned. The FAQs affirm such get-togethers held on the occasion of Diwali etc would attract FBT.

However, Independence Day and Republic Day would not count as festival days. So, now the companies might organise such get-togethers on these days. The decision to provide for a soft rate for pharmaceutical and software companies resulted in the inevitable question—in case a company has both brick-and-mortar and new-age businesses, what would be the ratio of allocation.

The answer is, in case separate books of account are maintained, there should be no issue but where separate books of account are not maintained, it would be in the ratio of salaries paid in each division.

This could tempt companies to so plan their salary disbursements that they maximize the benefit. It has been answered that a client reimbursing hotel boarding and lodging expenses would be chargeable to FBT.

While this violates the essence of the presumptive tax, the companies would ask customers to pay the bills directly to the hotel etc instead of routing it through their books of account. The client could also escape as there were no employees in the transaction.

To a question as to whether free medical samples provided would be liable to FBT, the answer is in the affirmative. The logic given is the decision of the Supreme Court in Eskayef Ltd 245 ITR 116 wherein the above act was ruled as sales promotion. Yet another answer states that brokerage and selling commission paid for selling goods would be not be liable for FBT.

In a similar vein, expenses incurred on salesmen appointed by distributors would not attract the levy. A holistic look at the answers pertaining to selling and distribution gives one the impression that free medical samples would come under FBT only because they are given free of cost and not because of the presumptive nature of the levy.

Credit card holders who have a tendency to splurge on their plastic money to get bonus points should be happy that they have escaped the tax as have discounts and rebates given to wholesalers or customers.

Firms do a lot of research for marketing their products. FBT deals a blow to them by taxing product marketing research conducted via employees. However, if the research is done through a marketing agency it is not liable to FBT.

The government seems to be imploring companies to set up separate marketing research units to avoid the tax. Cold calls made from a call center are also outside the scope of the levy. One can expect less freebies from firms due to the levy of FBT on expenses incurred including royalty and artwork charges on freebies.

The 700 crore that has been collected through FBT in the first leg would seem peanuts compared to the target of Rs 4,000 crore set by the government.

There is a school of thought which believes the government had other sources to raise this kind of money- increase in corporate tax rates, a no-holds-barred service tax or even a surcharge. Litigation seems to be looming large on FBT front due to the radical nature of the proposals.

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