Tax experts have challenged the finance ministry's clarification that any surplus accruing to an employee from per diem allowance for board and lodging expenses will be subject to fringe benefit tax.

"This conclusion does not appear to be as per the law, as any surplus from a per diem allowance was always taxable in the hands of the employee as a perquisite. The said position has not undergone any change even after the introduction of FBT. Therefore, such surplus should continue to be subject to tax as salary/perquisite in the employee hands and not subject to FBT," Rajiv Anand, Associate Director PricewaterhouseCoopers said.

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"If an employer were to incur expenditure for such purposes (travelling, boarding etc) not for itself but on behalf of another party for whom the work is being performed, it could be argued that in such situation, it is the person who is in receipt of the work (and not the person executing the work) who should be liable to pay the FBT," Anand said.

Similarly, under the FBT law, participation fee paid for the employees is not subject to FBT.

 "Where an employer pays a lumpsum participation fee to enable his employee to participate in a conference, it could be argued that the lumpsum fee should be treated as exempt from FBT by virtue of the above referred provision. However, the circular states that such fee needs to be apportioned and the part related to boarding, lodging and other similar expenses should be subject to FBT," he said.

Anand said the circular appears to suggest that LTA, which is not taxable in the employee hands by virtue of the exemption provided under Section 10(5) of the Act, will be subject to FBT.

"This appears to be a restrictive interpretation of the FBT law which has been introduced primarily to capture expenses which could not have been otherwise identifiable to any single employee,"  he said.

The Circular has also clarified that FBT is allowable for computing Minimum Alternate Tax liability.

"Though no reasons has been given for the said conclusion, it appears that the deduction has been allowed since FBT may not qualify as 'income tax paid or payable' and hence allowable for MAT computation purposes," he said.