Companies do not need to pay fringe benefit tax on Independence Day or Republic Day celebrations but will need to pay the tax for other festival celebrations or for organising exhibitions, performances, amusement, games or sports for its employees, the revenue department said on Monday.

Further, employee stock options have been excluded from the ambit of FBT along with gratuity and provident fund contributions, said the explanatory notes issued by the department late on Monday night.

It also said premium for group life or health insurance, paid by the employer, would be liable to the tax, unless statutorily required.

While expenditure on running and maintenance of motor cars is liable to FBT, the employees will not be liable to Income Tax on the perquisite value of the car. Interest on car loans is also liable to the tax.

• Special: What is fringe benefit tax?

The government clarified that travel expenses on finalising advertisements plans for a product would attract FBT. Similarly, hotel and travel expenses incurred by the company for executing an assignment for its client would be subjected to the tax but the client would not be liable to FBT for such payments.

Leave travel allowance, which is not in the nature of salary, as defined in the Income Tax Act, would be liable to FBT. Perquisites in the nature of lease or rented accommodation would also be exempted.

Fringe tax falls on health perk

The government on Monday said medical reimbursement up to Rs 15,000 for treatment in an unapproved hospital would attract fringe benefit tax.

"If any sum is paid by an employer for expenditure actually incurred by an employee for medical treatment in an unapproved hospital and it does not exceed Rs 15,000 during a year, such a sum does not fall within the meaning of 'salary' as defined in Clause (1) of Section 17 of the Income-tax Act, and not liable to income tax in the hands of the employee. There is no change in this position. Since such a sum is not taxable in the hands of the employee, the same is liable to the FBT," the revenue department said in its explanatory notes.

"As per the circular, the FBT is payable on medical reimbursement up to Rs 15,000 since the same is exempt from tax at the hands of the employee as a perquisite. Any amount paid in excess of this amount is, however, not subject to the FBT since the same is taxable in the hands of the employee. This does not appear to be in consonance with the government's intent to tax benefits, which otherwise were difficult to tax in the hands of the employee," said Rajiv Anand, associate director, PricewaterhouseCoopers.

The note also said business process outsourcing units, too, would be in the ambit of the FBT. The board clarified that the concessional valuation rate of 5 per cent available to computer software would not include information technology-enabled services.

Beverages too

It also said exclusive training centres of companies and the beverages served there would not be liable to the new tax but any spending at hired training centres would fall under the ambit of FBT. The note also said food, beverage, tour and travel and boarding and lodging expenses for in-house training sessions would fall under the ambit of FBT.

Brokerage to marketing agents spared

Selling commissions and brokerage to direct marketing agents are outside the ambit of the tax along with sale discounts or rebates given to wholesalers or customers and bonus points to credit card users.

Incentives to distributors for meeting sales targets and product marketing research expenses are exempted from FBT. Free samples of products would, however, be liable to the tax.

The note also said the proportion of the expenses liable to FBT would exclude the proportion of personal expenses incurred by the employees. For instance, out of Rs 100 towards tour and travel, if Rs 40 is in the nature of personal expense, the FBT would be applicable only on Rs 60.

Hospitals not liable to pay FBT

The note said the non-profit universities and hospitals, charitable trusts and law firms having retainer-relationship arrangements are not liable to pay fringe benefit tax.

While provisions of the double taxation avoidance agreements would not allow exemption from FBT, foreign companies with employees in India would be liable to pay FBT, though they can take credit for the payment under the DTAA.

The tax would not be applicable to employees of Indian companies abroad. "If the company maintains separate books of accounts for its Indian and foreign operations, FBT would be payable on the amount of expenses reflected in the books of accounts relating to the Indian operations," it said. In the absence of separate accounts, the expenses would be calculated proportionately.

A foreign company deputing its employees to India for a short duration under a technical supervision contract would be liable to FBT in India if the income of the employees is taxable in India or it has employees based in India other than those deputed.

All transactions where it was not possible to compute the value of the fringe benefits would not be liable to the tax. The revenue department, however, clarified that companies would be liable to FBT for the expenses incurred prior to the commencement of business.