The Central Board of Direct Taxes has clarified that a foreign company is liable to pay fringe benefit tax if the salaries (as defined in Section 17 of the Income Tax Act) of the employees of such firms are liable to income tax in India or if such a company has employees based in India other than those deputed to India for a short duration.

Further, if the foreign company incurs expenditure and claims reimbursement for such expenditure, the foreign company would be liable to pay FBT on expenditure so incurred.

However, if the Indian entity bears the expenses of such personnel deputed by the foreign company and includes those expenses under the appropriate heads, such expenses will be subjected to FBT as it is a presumptive tax.

• Special: Everything about Fringe Benefit Tax

FBT will apply to liaison offices of foreign companies in India if the liaison offices have employees based in India.

A foreign company not having any permanent establishment in India and doing business promotion through an event manager or a liaison office would not be liable to pay FBT in India if it does not have any employees based in India.

Despite the detailed clarification given by the board, the following anomalies require reconsideration:

A plain reading of the circular gives an impression that the base of expenditure is the employees working in India as FBT is a liability in respect of the employees. But, it has been said that FBT will apply ( in case of permanent establishment in India) on expenses incurred in India or outside India if such expenses are attributable to Indian PE.

This will create avoidable complications, particularly where part of the expenses are incurred in India and rest outside India. There will be innumerable cases where remuneration and facilities to employees will be provided both in India and outside India.

The circular clarifies that FBT will be applicable even if the income of the foreign company is not liable to tax in India. How could this provision be considered rational and reasonable.

In answer to a question, it has been clarified that if a foreign company has employees based in India and the remuneration received by all its employees is not taxable in India, then the foreign company will not be liable to FBT. The emphasis of the Board that all the employees should be non--taxable appears to be out of context.

A further relevant question is whether credit for FBT would be available in the country of foreign company's residence?

The CBDT has clarified that credit for FBT paid in India may be available in the foreign country of residence on the basis of the tax laws prevailing in that foreign country and in the light of the provisions of the Double Taxation Avoidance Agreement between India and that foreign country.

In this context, it may be noted that FBT has been termed as 'additional income tax'. The term 'additional income tax' has already been used in the context of distribution of dividend by a domestic company, which is required to pay the tax @ 12.5 per cent on the amount of dividend declared by it.

It was repeatedly pointed to the government that credit for such tax paid is not available to the shareholders because the term "additional income tax" is not mentioned in the tax treaties.

The same term ie, "additional income tax" has again been used with reference to FBT. With the result, foreign companies paying FBT in India may not get any credit for the same in their home country.

It is, therefore, advisable that a suitable amendment be made in the provisions of FBT to ensure that a non-resident company becomes entitled to avail tax credit for the FBT paid by it in India.

Needless to mention that such an amendment will directly benefit foreign investors without any impact on Indian tax revenues.

FBT casts a shadow on foreign firms

India's fringe benefit tax has spilled over on to foreign shores. Expenses outside India by foreign companies, including foreign banks with branches in India, for their Indian operations have been brought under the purview of the newly introduced FBT.

The decision is likely to raise legal issues over India taxing foreign companies for expenditure incurred outside India. Foreign companies' offices in India are allowed to deduct 5 per cent of their taxable income as head office expenditure for their branch operations. The government through the recent clarifications on FBT has made this 5 per cent deduction liable to the 30 per cent FBT.

"The inclusion of the head office expenditure as FBT expense is too far-fetched. The expenditure is in a foreign country. Implementation of this will be an issue, even in legal terms," according to Sudhir Kapadia, partner, at KPMG associate BSR & Company.

The exact allocation of the expenditure for the 5 per cent deduction allowed in India is also a difficult task, tax experts said.

Employee benefit is the material point behind the implementation of FBT. The government has already issued 107 clarifications and it needs to just issue a 108th clarification stating that FBT will not be leviable if there no employee is involved, Kapadia said.

The recent clarification also brings foreign companies into the FBT net if they send officials who are on their rolls to India to inspect operations of their Indian subsidiary. The foreign company will bear the expenditure, but will have to pay FBT in India.

Also, if a company, like Unilever, deputes one of its officials to its Indian subsidiary Hindustan Lever Ltd [Get Quote] and retains him on the rolls of the parent company, the London-based FMCG major will have to pay tax on the "fringe benefits" enjoyed by the official working in HLL.

Tax experts said the FBT clarifications haven't cleared all the anomalies in the FBT regime.

To drive home the point, they said if Microsoft founder Bill Gates were to visit India, the US software giant's India subsidiary will have to bear FBT on the domestic travel expenses of Gates.