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FBT vs Service Tax
October, 30th 2006

To avoid FBT, the author has suggested forming companies with only non-executive directors and no employees, and outsourcing work to the service providers on a retainership basis. The Circular No. 8/2005, August 29, 2005, has clarified that firms having no employees and a retainer-relationship arrangement will not be liable to FBT.

While thinking of this tax planning, the following aspects should be considered. Back-office services are liable to service tax at 12.24 per cent.

However, service tax is tax deductible; cenvat credit can be availed of on the tax on input services. The work can be assigned to service providers who are exempted under service tax (threshold limit). If the company is not eligible to avail of cenvat credit, the service tax is additional cost to it. There is no service tax, if there is employer-employee relationship.

Therefore, cost comparison between FBT and service tax liability has to be worked out before choosing the route of managing the affairs of the company through service providers.

V. Sundararajan

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