Foreign NGOs liable to pay Fringe Benefits Tax in India

September 25, 2006

Foreign NGOs liable to pay Fringe Benefits Tax in India

The  Indian Authority for Advance Rulings (“AAR“) has recently held that a foreign  non governmental organization (“NGO”) is liable to pay Fringe Benefit Tax (“FBT”) in India even if no income-tax is payable on its total income computed in accordance with the provisions of the Income Tax Act, 1961 (“ITA”).

Chapter XII-H of the ITA, with sections 115W to 115WL, contains the definition section, the charging section, assessment, etc in relation to FBT. Section 115WA, the charging section, provides that FBT shall be levied in addition to income tax charged under the ITA and shall be levied on the fringe benefits provided or deemed to be provided by an employer to his employee. Clause (2) of section 115W clarifies that FBT shall be payable by an employer even if he is not otherwise liable to pay income tax. According to section 115 WB (1), fringe benefits are any privilege, service, facility or amenity directly or indirectly provided by an employer to an employee by reason of his employment, or any reimbursement made by an employer directly or indirectly for any purpose, or any free or concessional travel ticket for private journeys, or any contribution by an employer towards an approved superannuation fund.

In the instant ruling, the applicant, ‘The Population Council, Inc. U.S.A. (“Population Council“), a resident of USA is an international not for profit,  NGO  that is primarily engaged in bio-medical research in reproduction and family planning. The applicant enjoys tax exemption in the U.S. under the Internal Revenue Code of the U.S. and its activities in India fall within the approved objects for the purpose of granting exemption in the U.S. Its presence in India is comprised of a regional office and a country office. Notably however, it does not enjoy exemption from tax in India under sections 10(23C) or section 12AA of the ITA. It sought a ruling from the  AAR  on whether it is required to pay FBT in India.

Population Council’s case was that it does not generate any income in India, it is not subject to tax in India on income, and also its expenses are met by foreign inward remittances. Hence, it should not be liable to pay FBT. While FBT is chargeable in addition to income tax and is a measure to compute additional tax liability,  Population Council argued that if a person is not liable to pay income tax  in India in the first instance, there can be no additional tax liability calculated on  it on account of  fringe benefits. The applicant further contended that  clause (2 )  of Section 115WA of the ITA does not apply to  it, as it has no income  in India, which is required to be computed in accordance with the provisions of the ITA.

On an interpretation of the said sub-section, the AAR held that the sub-section  is clarificatory in that ,  even when no income tax is payable by an employer on his total income, the tax on fringe benefits shall be payable by such employer. The AAR further held that it would be futile to contend that if there is no total income which can be computed in accordance with the provisions of the ITA, no FBT would be payable by the employer and that such an interpretation would be contrary not only to the intention of the Parliament but also  to  the plain language of the provision and the basic principles of interpretation.

It is to be noted that under the provisions of section 115W of the ITA, any person, eligible for exemption under section 10(23C) or registered under section 12AA of the ITA or a registered political party is deemed not to be an “employer” and hence not liable to pay FBT under the provisions of FBT.

Impact: A non-resident, whose income is not taxable under the ITA is liable to FBT in India. Any NGO, which has not obtained tax exempt status in India would be liable to pay FBT, irrespective of whether it is set up as a liaison office or a branch or a chapter in India  and is tax exempt in its home country.

Source: AAR No 677 of 2006