FBT circular raises more questions than it answers

As is their wont, the government has come out with Circular No 8/2005 just a few days before the last date for paying the much-discussed fringe benefit tax (FBT) without being visited by the ubiquitous penalty clauses. The government succeeded in keeping the suspense alive by promising the notification every now and then.

Since all the marquee companies have announced their quarterly results after providing for the FBT, the circular will be useful in correcting any wrong assumptions made. On second thought, this would appear to be near impossible given the fact that the circular seems to have left no stone unturned to collect this new found levy.

The basic mantra behind the levy appeared to be to tax expenses incurred on employees by Indian companies and/or foreign companies who were Indian companies as far as the law is concerned.

Question No 24 of the FAQs asks innocuously whether foreign companies sending their employees on tour to India were required to pay FBT on their travel cost. One would have expected this to be answered in the negative but the government has pulled out a stunner""if a foreign company has employees in India, it would be liable to pay FBT on the travel costs and other fringe benefits as defined in the much-maligned Section 115WB for their employees who travel to India.

At first blush, the government appears to have got its thinking cap off. Why would a firm be liable to pay FBT on persons who are not their employees? The problem is further complicated if the employee concerned is on the rolls of the parent company rendering services in India which would destroy the employer-employee nexus which appears to be the sine-qua-non for FBT.

One gets flummoxed when one reads the answer to Question No 25""whether a foreign company which does not have a permanent establishment (PE) in India is liable to pay FBT. The answer is "no", since the liaison office did not have employees, thereby, bringing out of the inanity in the scheme.

Hence, a foreign company having only a liaison office with no employees escapes the levy while the same company with employees in India pays FBT for travel costs of non-Indian employees.

To add a sense of balance, FAQ No. 27 regarding a foreign company having a PE in India incurring expenditure outside India being subject to the levy is answered nonchalantly by stating that once there is a PE, expenditure incurred globally is liable to the tax. One should interpret this to mean that expenditure should be incurred on Indian employees.

One wonders what would be the take of the government if the CEO of a multinational company with a PE in India has a lunch with his counterpart in the US? Would the expenditure be split and only the expenditure incurred by the Indian CEO be FBTed?

To the question whether credit would be available in the foreign country of residence, the reply is non-committal since it asks us to read the Double Tax Avoidance Agreements (DTAA) and claim any benefits written therein. No DTAA would explicitly talk of FBT leaving one wondering whether the word tax used in the DTAA would include FBT?

One saving grace for foreign companies is the fact that the reply to Question No 31 gives an exemption to foreign companies whose employees are not taxed in India in terms of the article relating to dependent services. Foreign companies who depute personnel to India for short-term contracts would pay FBT if the salary of such employees is liable to tax in India. In case such expenses are reimbursed by the Indian company, the Indian company would have to cough up the FBT.

In the time that was available, the government has attempted to answer as many niggling questions on FBT as it could. History tells us that the last word has not been said yet since day-to-day situations could some times give rise to more than 107 situations as visualised by the government.

The action is already on""the Andhra Pradesh High Court has directed the tax department on August 30 to compute the amount on which FBT is payable at the rate of 5 per cent and not 20 per cent till further directions are given.

Mohan.lavi@gmail.com