The Hindu Business Line : Fuzziness on the fringe

FRINGE benefit tax (FBT) is now here to stay. Corporates and partnership firms carrying on business will now have to take stock of the situation and arrive at the estimated liability for 2005-06 and gear themselves to pay the first instalment of advance tax due on July 15, 2005.

The Institute of Chartered Accountants of India (ICAI) has also swung into action by releasing a draft of the Guidance Note on accounting for FBT.

As the title itself suggests, the note has steered clear of legal interpretations and has confined its ambit to presentation and disclosures. Issues on interpretation is a separate matter altogether and already debates are raging on various components of payments that could be liable for FBT.

The problem here is not one of implementation but weighing the risks in taking a legal view that a particular payment is not liable for FBT. These are early days and one does not know the approach the Income-Tax Department would adopt in scanning through the various items forming part of establishment costs and administrative overheads.

Employee benefits

The Guidance Note has emphasised that by and large payments in the nature of employee benefits are exposed to FBT. Reference to employee benefits is made in the context of AS-15 (Revised 2005) where the employee benefits is defined as under:

"Employee benefits are all forms of consideration given by an enterprise in exchange for services rendered by employees."

While analysing whether payments relating to employee benefits are liable to FBT, para 8 of the draft Guidance Note interprets the issue thus:

"With a view to determine whether the Fringe Benefits Tax is in the nature of employee cost because it is incurred in relation to the employees who are provided or deemed to have been provided specified benefits by the employer even though it is not in the nature of employee benefits, it is noted from the salient features of the Fringe Benefits Tax that under deeming provisions, the tax is levied on certain expenses, such as sales promotion, entertainment, travel, and so on, which are not necessarily incurred for the benefit of the employees. Accordingly, the Fringe Benefits Tax is not necessarily of the nature of employee cost."

This conclusion is itself questionable since the basic objective of this tax as mentioned in the Finance Minister's speech is to tax payments made by employer to employee which are in the nature of perquisites, but several items categorised as deemed fringe benefits have nothing to do with employees at all.

Presentation and disclosure

Since FBT is another form of tax, presentation in the accounts assumes significance. Paras 12 and 13 deal with presentation. Paragraph 5 of Accounting Standard (AS) 5, `Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies', issued by the Institute of Chartered Accountants of India, provides thus:

"5. All items of income and expense which are recognised in a period should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise."

Since FBT is an expense for the employer, it should be included in the determination of net profit or loss for the period, that is, the FBT should be charged to the profit and loss account. As FBT is a levy on the employer in respect of certain specified expenses incurred by it, its charge to the P&L account should be in the same manner in which the related expenses are charged, that is, before arriving at `profit before tax' for the period.

Keeping in view the nature of FBT, it should be disclosed as a separate line item on the face of the P&L for the period in which the related fringe benefits costs are recognised.

Basically, therefore, FBT is an item of expense and charged in the P&L account before arriving at profit before tax for the period. This presentation and disclosure has to be made distinctly and separately. FBT is not an allowable business deduction and that will appear in computing the statement of total income liable for income-tax. Similarly, provision of FBT (net of advance tax) at the year-end will be disclosed in the balance-sheet under the head `provisions'.

While these disclosures are necessary in drawing up the accounts, both interim and final, for 2005-06, the format in Schedule VI of the Companies Act needs to accommodate this item particularly when the new Companies Bill is ready by the end of 2005.

The timeliness of the Guidance Note is welcome but the challenge now is to come up with another Guidance Note, which will aid the `accountant' to certify the liability of FBT, which will be the basis for completion of the assessments relating to FBT.

(The author is a Chennai-based chartered accountant.)

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