The Hindu Business Line : On the frequently asked questions about FBT

AS IS THEIR wont, the Government has come out with Circular No 8/2005 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 FBT on their own interpretations, the Circular would be useful to correct any wrong assumptions made when FBT was calculated for the first time. On second thoughts, this would appear to be well nigh impossible considering the fact that the Circular seems to have left no stone unturned to collect this newfound levy.

The basic mantra behind the levy appeared to be to levy the tax on 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 frequently asked questions (FAQs) asks innocuously whether foreign companies sending their employees on tour to India were required to pay FBT on their travel cost more so if they are not liable to tax on Indian shores. 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 company 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 on reading the answer to Question No 25 on whether a foreign company which does not have a permanent establishment (PE) in India would be liable to pay FBT. The answer is an affirmative `No' since the liaison office did not have employees, bringing out, thereby, the inanity of the scheme. Hence, a foreign company having only a liaison office with no employees goes out of 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 pretty much 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 Government's take 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 (DTAAs) 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. But day-to-day situations can throw up more than the 107 visualised by the Government. In Andhra Pradesh, for instance, the High Court has directed the tax department to compute the amount on which FBT is payable at 5 per cent, and not 20 per cent, till further directions are given.

What's service?

IT IS common practice in India to define words that form the crux of an Act — income being an example as far as the Income-Tax Act is concerned. However, after a tumultuous 11 years, we are yet to find a definition for the word "service" under service tax law. Whilst the list of services and, thereby, service providers multiplies, what part of their services would tantamount to service is a question that goes abegging. It has been the tradition in India to rely on interpretations of dictionary meanings and court judgements to get to the meaning.

It would appear strange that the word service has been defined before and, yet, does not find a place in the Finance Act, 1994 as amended. The MRTP Act, 1969, the Consumer Protection Act, 1986, The Foreign Exchange Management Act, 1999 and the Trademarks Act, 1999 have defined the term on more or less as follows:

Service of any description which is made available to potential users and includes the provision of services in connection with the business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy and boarding and lodging.

The journal International Accounting: Business & Insurance defines it to be "something provided, usually for a fee, that may not be classed as manufacturing or production in any form". The common items that emerge from the above definition are that there should be a service provided and it should not be classed as manufacturing or production. The word manufacturing under the Central Excise Act has itself been the cause of many a legal case while production is spoken of in the same terms as manufacturing, thereby rendering it equally hazy.

Court/CESTAT decisions rendered over the past few years have given a different picture of what service involves. It commenced with the CESTAT decision in Daelim Industrial Company wherein it was held that a works contract could not be broken up and a portion of it subjected to tax.

The Metlezer Automotives case ruled that design and development charges paid for a mould could not be considered as a service. Bajaj Auto Ltd vs Commissioner of Central Excise, Aurangabad 2005 (179 ELT 481) and Aviat Chemicals Pvt Ltd vs Commissioner of Central Excise Mumbai 2004 (170 ELT 466) taught us that royalty payments would not attract the levy. In spite of this, one had to wait for Yamaha Motors (I) Pvt Ltd vs Commissioner of Central Excise Delhi 2005 (186) ELT 161) to spell out that royalty payments for technical information, trademarks and IP rights would not form a part of the definition of service and, hence, escape the tax net.

What makes the possibility of giving a finite definition all the more difficult is the fact that, under the existing regime, select services of a particular service provider are exempt — tax services provided by a chartered accountant and information technology services provided by a management consultant being cases in point.

It has been more than 11 years since the service tax juggernaut started rolling. The law has certainly matured to an extent that it is probably time to start taxing all services which was one of the recommendations of the Task Force on the Fiscal Responsibility and Budget Management Act. There would be no rebates or exemptions given for chosen services of service providers. One can take a cue from the diktat of the Supreme Court in Lucknow Development Authority vs M. K. Gupta (AIR 1994 SC 787) where the court said:

"How service should be understood and what it means depends on the context in which it has been used in an enactment." While this could be tantamount to not defining it at all to the layman, we could use the above guideline to define service to mean "something provided for a fee that is made available to potential users and includes all services specifically defined in Section 65 of the Finance Act, 1994 but does not include: contracts that cannot be vivisected; royalty payments; technical knowhow fees; manufacturing or production activities as defined in the Central Excise Act; any other activity that the Central government may define as being exempt."

This definition should suffice till the Goods and Service Tax stops becoming a dream.

(The author is Hyderabad-based chartered accountant.)

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