THE long-awaited explanatory circular on fringe benefit tax (FBT) issued by the Central Board of Direct Taxes (CBDT) may provide no comfort to employers. The circular states that every company, firm or association of persons that employs at least one person will be liable to pay FBT on expenses specified in Finance Act, 2005.

So your drivers' salary and periodical and books bill reimbursed by your employer, expenses on prizes for your achievement as well as transportation facility provided to
your children will attract FBT. Reimbursement of expenditure by your company on food and beverages consumed by you in office too will be liable to FBT.

But shares, debentures or warrants issued under Esop will be exempt from this tax. Employer's contributions towards employee's gratuity and PF, if these funds are approved by the government, will be outside FBT net. Food vouchers used for payment are also exempt from fringe tax.

Contributions to group personal accident/workman compensation insurance that is not statutory in nature will attract FBT.

The circular clears the confusion about applicability of the tax on various expenditures that are described as fringe benefits as they are not a component of the salary of an employee. These expenditures are taxed in the hands of the employer at 20%, 50% or 100% as specified in the Act. Trusts, fund or institutions and other Section 25 (of Companies Act, 1956) companies if their income is exempt under Section 10(23C) or are registered under Section 12AA will be liable to pay FBT.

No FBT on advances

TRUSTS, fund or institutions and other Section 25 (of Companies Act, 1956) companies if their income is exempt under Section 10(23C) or are registered under Section 12AA will be liable to pay FBT.

FBT is payable in the year in which the expenditure has been incurred. Therefore, FBT would not be payable on payment of advance towards expenses to be incurred in the future.

Expenses incurred by a company on it employees on travelling, hotel, etc for execution of an assignment of its client will be liable to FBT even if the expenses have been reimbursed by the client. The client will not be liable for FBT for such expenditure.
Also, expenditure incurred by a professional - like a lawyer or auditor - on conveyance, travel, tour and reimbursed by client will not liable to FBT in the hands of the client. The circular further states that segregation of expenditure on fringe benefit where the expense is made on employees and non-employees will not be allowed. Expenditure on fringe benefits provided prior to commencement of business will also be liable to the tax. The circular also expenditure on conference of agents, dealers and development advisors will be liable to FBT. So would be expenditure on brand, brand ambassador and celebrity endorsement.