Volume 2, Issue 2


28th January, 2009


Tax Alert
FBT on Value of Electronic Meal Cards
Provided by an Employer to Employees

Section 115WB(2)(B) casts a liability on an employer to pay fringe benefit tax (‘FBT’) on the expenditure incurred for ‘provision of hospitality’ to the employees. However, expenditure incurred for food/ beverages provided in office/factory and those paid by non‐transferable food coupons usable only at eating joints, have been specifically excluded from the ambit of ‘provision of hospitality’ and hence are not liable to FBT.

In addition to the above, the Finance Act, 2008 in Section 115WB(2)(B) inserted additional sub‐clause (iii), stating that with effect from financial year 2008-09, expenditure incurred on non-transferable prepaid electronic meal card usable only at eating joints fulfilling prescribed conditions would also not be liable to FBT. The Income tax Department, has now inserted Rule 40E via Notification No. 1/2009 dated 5th January, 2009 prescribing the conditions for the electronic meal card referred in Section 115WB (2)(B)(iii).

Conditions prescribed under Rule 40E

As per a combined reading of section 115WB(2)(B)(iii) and the new Rule 40E, an employer wanting to issue the electronic meal cards needs to have a tie up with a bank which, in turn would issue the meal cards to the employees in pursuance of the agreement entered into with the employer. The issuing bank will also enter into a contract with a restaurant/ hotel/canteen/outlet selling ready to eat food or non‐alcoholic beverage (member establishment) authorizing to allow purchases against the meal card in accordance with the following conditions prescribed under the Rule.

  • The meal card shall be granted by the employer to its employees under a scheme framed by the employer laying the conditions when meal card can be used by the employee.
  • The meal card shall be issued by the issuing bank, bearing the name of the employer along with the name, photograph and signature of the employee to whom the card is issued.
  • An employee shall not be issued more than one meal card.
  • The meal card shall be used only by the employee to whom the card is issued.
  • The meal card shall be used by the employee only at a member establishment.
  • The aggregate amount of ready to eat food or non‐alcoholic beverage purchased during a day by an employee shall not exceed one hundred rupees.
  • The details of each transaction of purchases made by the employee against the meal card shall be maintained by the employer and the member establishment

It may be noted that the above conditions are specifically in respect of electronic meal cards and are not in respect of the existing meal coupons which most companies are using (e.g. Sodexho, Accor etc.). These meal coupons can continue to be used by employers for being issued to employees. However, with respect to these coupons, there are certain concerns – the most important of which is dealt with below.

Misuse of the food coupons issued under Section 115WB(2)(B)(ii)

In a recent decision of CIT (TDS) vs. Reliance Industries Ltd (2008) 175 TAXMAN 367 (Gujarat) (High Court), the debate was whether the employer has defaulted by not deducting tax at source when the non-transferable food coupons of a contracting party (like Sodexho) usable only at eating joints issued to the employee are misused by an employee. Though the High Court held that the employer could not envisage at theissuance of the coupons that the employees would misuse them, the employer and the contacting party were required to establish that they had taken sufficient steps to prevent the misuse of the coupons.

Conclusion:

Based on the conditions under the Rule 40E and the above judgment, it is clear that the income tax department is looking at the expenditure incurred in providing hospitality as being specifically not liable to FBT under a close scanner. In light of the same, from financial year 2008–09, the employer should relook at the loop holes, if any, in the issue of the non-transferable food coupons to stay clear off any litigation. Alternatively, the employer can look at the option of issuing a meal card under the prescribed conditions. Further, it may be advisable to take suitable undertakings from employees about the user of the meal coupons/cards so as to protect the company from possible litigation in future if an employee does happen to misuse the coupon/card. We at SKP, would be happy to look into the current structure and, based on your need and present circumstances, advise on the better of the two options.

For ready reference, the notification issued by the Government is reproduced below.

INCOME-TAX (FIRST AMENDMENT) RULES, 2009 - Insertion OF RULE 40E NOTIFICATION NO. 1/2009, DATED 5-1-2009

In exercise of the powers conferred by section 295 read with sub‐clause (iii) of clause B) of sub‐section (2) of section 115WB of the Income‐tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income‐tax Rules, 1962, namely :

1. i These rules may be called the Income‐tax (First Amendment) Rules, 2009.
  ii They shall come into force with effect from the 1st day of April, 2009.
2.   In the Income‐tax Rules, 1962, in Part VIIC, after rule 40D, the following rule shall be inserted, namely:

Prescribed conditions for the purposes of subclause (iii) of clause (B) of sub‐section (2) of section 115WB.

40E. For The purposes of sub‐clause (iii) of clause (B) of sub‐section (2) of section 115WB, the non‐transferable pre‐paid electronic meal card (hereinafter called the "card") shall fulfill the following conditions, namely:

  1. The card shall be granted by the employer to its employees under a scheme framed by the employer specifying therein the circumstances under which the meal card can be used by the employee.
  2. The card under clause (i) shall be issued by the issuing bank.
  3. An employee shall not be issued more than one card.
  4. The card shall bear the name of the employer along with the name, photograph and signature of the employee to whom the card is issued.
  5. The card shall be used only by the employee to whom the card is issued.
  6. The card shall be used by the employee only for the purpose of purchasing ready to eat food or non‐alcoholic beverage from a member establishment.
  7. The aggregate amount of ready to eat food or non‐alcoholic beverage purchased during a day by an employee shall not exceed one hundred rupees.
  8. The details of each transaction of purchases made by the employee against the card shall be maintained by the employer and the member establishment in such manner and for such period as is required under the Act for any other similar transaction.

Explanation.‐ For the purposes of this rule,

  1. “Banking company" shall have the same meaning as assigned to in clause (viii) of sub ‐section (1) of section 36 of the Act;
  2. "Issuing bank" means a banking company ‐
    1. which issues the card to the employees of an employer in pursuance to an
      agreement entered into with the employer; and
    2. which has entered into a contract with the member establishment authorizing him to allow purchases against the card issued by it in accordance with the conditions stipulated in sub‐clause (iii) of clause (B) of sub‐section (2) of section 115WB and this rule; and
  3. "Member establishment" shall mean a restaurant, hotel, canteen or an outlet which sells ready to eat food or non‐alcoholic beverage, but shall not include a restaurant, hotel, canteen or an outlet selling alcoholic beverage.