A foreign company with a branch or a liaison office in India will have to pay fringe benefit tax (FBT) even if it has only one employee on its rolls stationed here. The finance ministry is set to make it clear that FBT has to be paid by the employer irrespective of the staff strength.

This will hold good for all companies - domestic and foreign. The employer will have to pay tax for providing fringe benefits to the employee if the terms of the contract state that there is an employer-employee relationship.

Several foreign companies maintain branch and liaison offices with skeletal staff here and doubts have been raised on whether such companies will be liable to pay FBT. "The explanatory circular on FBT will resolve contentious issues relating to FBT on foreign companies and non residents. The CBDT has evolved a common yardstick for this," said a senior government source.

No policy changes are on the anvil. For instance, employers who have to pay FBT on the contributions made to the superannuation fund of their employees are unlikely to be given any relief. The issue can be addressed only in the next budget, said sources.

Foreign companies also send their technical experts here to work on projects. Indian tax authorities deduct tax at source (TDS) - or withholding tax - on payments received by them as fee for technical services. There have been queries on whether the foreign company will also have to pay FBT on expenses incurred by these employees. As the law stands now, FBT will have to be paid by the foreign company. However, tax experts reckon that this would push up overall tax costs and, in turn, impact project costs.
The Central Board of Direct Taxes (CBDT) will also make it clear that FBT will not be charged on expenses that do not fall under any specified head. There are various categories of expenses - conveyance, tour and travel, use of hotel, boarding and lodging, use of telephone, gifts - on which FBT has to be paid by the employer. A 30% tax is charged on a defined base.

Pharma companies and computer software companies have a lower FBT liability on expenses incurred by their employees on travel, boarding and lodging. If the pharma company has other businesses, the company will have to bifurcate expenses to get the concessional tax benefit. This will be clarified in the circular.
An employer will not have to pay FBT on remote area allowances provided to an employee. Companies who pay excess FBT in the first quarter will be allowed to adjust this against their liability in the second quarter, said officials.
The deadline for the first quarter payment is July 15.