"Let's say you get a lunch for yourself and get it reimbursed from your office. Your firm attracts the Fringe Benefit Tax. A simple theoretical way of avoiding this tax is to buy a lunch for your client and let your client buy a lunch for you and claim the reimbursements from your respective offices. This will not attract FBT," said P V Srinivasan, head of tax at Wipro [Get Quote] Limited.

Speaking at a BCIC workshop on 'Fringe Benefit Tax -- Impact of Clarificatory Circular' issued by the Central Board of Direct Taxes on August 29, he said: "There are many ways in which a firm can work around to avoid the FBT.  The rule discourages healthy corporate governance practices at a time when Indian companies are increasingly adopting measures to be more transparent."

• FAQs on fringe benefit tax

CBDT had issued the clarification circular following the confusion surrounding the levy of FBT and the number of issues that have been thrown up on its application and valuation.

The stated objective of this circular, according to CBDT, is to provide a harmonious, purposive and contextual interpretation of the provisions of the Finance Act, 2005 relating to FBT so as to further the objective of this levy.

The circular claims that the levy of FBT is based both on grounds of equity and economic efficiency and it attempts to provide answers to the confusions related to principles, foreign company and liaison offices and specific expense-related issues.

CBDT has acknowledged that the taxation of fringe benefits raises problems. For instance, all benefits cannot be individually attributed to employees, particularly in cases where the benefit is collectively enjoyed.

In addition to this, CBDT attempts to clarify on the widespread practice of providing perquisites, wherein many perquisites are disguised as reimbursements or other miscellaneous expenses and of the difficulty in the valuation of the benefits.

Srinivasan further said that compliance with the FBT law is inevitable in view of the recent clarifications issued by the CBDT signifying the importance attached by the revenue department to the new levy. But the virtues claimed by CBDT such as simplicity, minimum disputes, low compliance costs and less administrative burden are yet to be met, he added.

"In a way the circular has mitigated the concerns on many issues but has opened up concerns on new issues not stated by the law. The law and the circular is likely to be a subject matter of prolonged litigation even in the distant future," Srinivasan highlighted.

Sharing his views on this circular, Indraneel Roy Choudhury, a director at PricewaterhouseCoopers said: "The tax collection in Q1 of FY06 is at Rs 600 crore (Rs billion) (Rs 6 billion) and judgement is out whether FBT is a golden goose or an ugly duckling. Every government has a right to levy taxes. But no government has the right to cause misery or harass the taxpayer."