Foreign NGOs may face fringe benefit tax
The Indian Authority for Advance Rulings (AAR) has decided in a recent case that a foreign non-governmental organisation (NGO) is liable to pay fringe benefit tax (FBT) in India.
By K Yatish Rajawat & M Padmakshan, TNN |
MUMBAI: The Indian Authority for Advance Rulings (AAR) has decided in a recent case that a foreign non-governmental organisation (NGO) is liable to pay fringe benefit tax (FBT) in India. The FBT will be payable even if there is no income tax payable on its total income in the country.
NGOs by their nature are non-profit organisations and do not generate any income as defined by the Income Tax Act (ITA). AAR’s ruling means that a non-resident, whose income is not taxable under the ITA, is liable to pay 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.
“While the ruling is specific to one case, it will set precedent for similar entities in the country. Foreign NGOs will have to seek a specific tax exempt status from the commissioner of income tax and will have to be registered with them. The registration requires the NGO to meet certain criteria like 85% of their corpus needs to be invested in development activities, etc,” Archana Rajaram, associate at legal firm Nishith Desai & Associates, said.
AAR has given a ruling in a case presented by the Population Council, a US NGO which works in the area of family planning and population control. The NGO enjoys tax exemption in the US under the Internal Revenue Code.
The NGO claims that its activities in India fall within the approved objects for the purpose of granting exemption in the US. It has a regional office and a country head office India. Population Inc does not have exemption from income tax in India under Sections 10 (23C) or 12AA of the ITA.
The NGO voluntarily sought a ruling from the AAR on whether it is required to pay FBT in India. “The ruling seems to be discriminating against foreign NGOs and seems unfair in nature, if Indian NGOs are exempt then foreign NGOs should also be treated similarly,” T P Ostwal, senior chartered accountant, said.
Population Council’s primary argument with AAR was that as it does not generate any income in India, it is not subject to tax in India on income, and its expenses are met by foreign inward remittances. Hence, it should also not be liable to pay FBT in India.
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.
Population Council argued that the section of the Income Tax Act 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. AAR in its interpretation of the regulation said that even when there is no income tax payable by an employer on his total income, the tax on fringe benefits shall still be payable by such employer.
The AAR has 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 Parliament but also to the plain language of the provision and the basic principles of interpretation.
Fringe benefits are privileges, services, facilities or amenities directly or indirectly provided by an employer to its employees. It includes any reimbursement made by an employer directly or indirectly for the purpose of travel and contribution towards superannuation fund.
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