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Freebies to come with a price tag too!

31-August-2005
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Freebies to come with a price tag too!

The next time HLL, Nestle or Colgate offer freebies such as cups with a pack of tea leaves, cold coffee shaker with instant coffee powder or a free toothbrush with pack of toothpaste, they will have to pay fringe benefit tax (FBT) on such expenditure. All these expenses are to be treated as sales promotion expenditure and therefore, are liable to FBT.

Similarly, free samples of medicines distributed by pharmaceutical companies to doctors also qualifies as sales promotion expenditure and will, therefore, attract FBT. And that could be the case for consumer durable companies that give away freebies - such as a DVD player with a colour TV or film/music software with a player - could be asked to pay FBT on expenditure incurred on free offers.

Although FBT is set to increase the tax liability of companies, the FMCG companies may be the ones that would be most biggest hit, according to assessment of Deloitte Haskins & Sells senior director Neeru Ahuja.

The Central Board of Direct Taxes (CBDT) explanatory circular on FBT issued yesterday has stated that “any expenditure on free offers with products such as freebies like tattoos, cricket cards or similar products, to trade or consumers is for the purpose of sales promotion and publicity and is therefore liable to FBT.”

Advertising expenses such as spending on making an ad-film is exempt from levy of FBT but celebrity endorsement and brand ambassadors would be liable to FBT. There seems to be a contradiction in the interpretation given by CBDT, says Institute Chartered Accountants of India fiscal laws committee chairman Ved Jain. A large number of FMCG, durables and automobile companies use celebrities such as film stars to endorse their products and they are central to most ad-films.

Mercifully for the companies, expenditure on incentives given to distributors for meeting quantity targets have been spared from the levy of FBT. Companies offer free goods and cash incentives to dealers and distributors for meeting sales targets. These expenses are treated as ordinary selling costs. But expenditure on conferences of agents and dealers will be liable to FBT.

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