FBT

FRINGE BENEFIT TAX – AN APPRAISAL

Introduction:-
Fringe Benefits are perquisites provided by an employer to his employees in addition to the cash salary or wages paid. These benefits are either taxed at the hands of employees themselves or the value of such benefit is subject to a ‘fringe benefit tax’ at the hands of employer. In most of the countries like UK & Malayasia these benefits are taxed in the hands of the employees only. In India, however, the two pronged approach is followed i.e. the benefits which can be directly attributable to the employee are taxed in the hands of the employee and the benefits which are enjoyed commonly by the group of employees are taxed in the hands of employer. The rational for levying Fringe Benefit Tax on the employer lies in the inherent difficulty in isolating the personal element where there is collective enjoyment of such benefit and attributing the same directly to the employee.

The Provisions :-
The Finance Bill, 2005 proposes to introduce the scheme of Fringe Benefit Tax which is further amended by the Finance (Amendment) Bill 2005. According to the Bill Fringe Benefit means :-
• Any privilege, service, facility, or amenity directly or indirectly provided by the employer, whether by way of reimbursement or otherwise, to his employees (including former employees), but does not include the perquisites in respect of which tax is paid or payable by the employees,
• Any free or concessional tickets provided by the employer for the private journeys of the employees and their family members, and
• Any contribution of the employer to an approved superannuation fund shall be
considered as fringe benefits.
Further, in addition to the above, the fringe benefit shall be deemed to have been provided by the employer to his employees, if the employer has in the course of his business or profession incurred any expense on, or made any payments for the specified purposes. A certain amount or percentage of such expenses or payment shall be deemed to be fringe benefits provided by employer to his employees and shall be taxed at the rate of 30% in the hands of the employer. Accordingly the Deemed Fringe Benefits are :-

Ø 20 % of the expenses incurred or payment made by the employer in the course of his business or profession for entertainment.

Ø 20 % of the expenses incurred or payment made for the provision of hospitality of every kind by the employer or any person, whether by provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom of usage of trade but does not include-
(a) any expenditure on, or payment for, food or beverages provided by the
employer to his employees in office or factory;
(b) any expenditure on, or payment through paid vouchers which are not transferable and usable only at eating joints or outlets.
However, in the case of an employer engaged in the business of hotel, the value of fringe benefits in respect of this expense shall be 5 % instead of 20 %.

Ø 20 % of the expenses incurred or payment made by the employer in the course of his business or profession on conference but it does not include the fee for participation by the employee in the conference. However, any expenditure on conveyance, tour and travel (including foreign travel) or hotel, or boarding and lodging in connection with any conference shall be deemed to be expenditure incurred for the purpose of conference. [In other words it can be said that making the employee to attend the conference is not termed as fringe benefit but bringing the employee to the conference shall be termed as fringe benefit.]

Ø 20 % of the expenses incurred or payment made by the employer in the course of his business or profession on sales promotion and publicity, however, the following shall not be considered as expenditure on sales promotion and publicity for the purpose of calculation of fringe benefit :-
(a) any expenditure on advertisement of any form, including rental, in any print or electronic media or transport system. Print media includes journals, catalogues, price lists etc.
(b) any expenditure on advertisement on the holding of, or the participation in, any press conference or business convention, fair or exhibition,
(c) any expenditure on advertisement on sponsorship of any sports event or any other event organized by any Government agency or trade association or body,
(d) any expenditure on the publication of any notice required to be published by or under any law or by any order of any court or tribunal in any print or electronic media,
(e) any expenditure on advertisement by way or signs, art work, paintings, banners, awnings, direct mail, electric spectaculars, kiosks, hoardings, bill boards or by way of such other medium of advertisements, and
(f) any expenditure by way of payment to advertising agency for the abovesaid purposes.

Ø 20 % of the expenses incurred or payment made by the employer in the course of his business or profession on employees’ welfare, however, this shall not include any expenditure incurred or payment made to fulfill any statutory obligation or mitigate occupational hazards or to provide first aid facilities in the hospital or dispensary run by the employer;

Ø 20 % of the expenses incurred or payment made by the employer in the course of his business or profession on conveyance, tour and travel and it includes foreign travel. However, in the case of the employer, who is engaged in the business of construction or in the business of manufacture or production of pharmaceuticals or in the business of manufacture or production of computer software, the value of fringe benefit in respect of this expense shall be 5 % instead of 20%.

Ø 20 % of the expenses incurred or payment made by the employer in the course of his business or profession on use of hotel, boarding and lodging facilities. However, in the case of the employer, who is engaged in the business of manufacture or production of pharmaceuticals or in the business of manufacture or production of computer software the value of fringe benefit in respect of this expense shall be 5 % instead of 20 %.

Ø 20 % of the expenses incurred or payment made by the employer in the course of his business or profession on repair, running (including fuel), maintenance of motor car and the amount of depreciation thereon. However, in the case of the employer, who is engaged in the business of carriage of passengers or goods by motorcar the value of fringe benefit in respect of this expense shall be 5 % instead of 20 %.

Ø 20 % of the expenses incurred or payment made by the employer in the course of his business or profession on repair, running (including fuel), maintenance of air crafts and the amount of depreciation thereon. However, in the case of the employer, who is engaged in the business of carriage of passengers or goods by aircrafts the value of fringe benefit in respect of this expense shall be 5 % instead of 20 %.

Ø 20 % of the expenses incurred or payment made by the employer in the course of his business or profession on the use of telephone (including mobile phone) but it does not include the expenditure on leased telephone lines;

Ø 20 % of the expenses incurred or payment made by the employer in the course of his business or profession on maintenance of accommodation in the nature of guest house, however, it does not include the expenditure incurred on maintenance of accommodation used for training purposes;

Ø 50 % of the expenses incurred or payment made by the employer in the course of his business or profession on festival celebration;

Ø 50 % of the expenses incurred or payment made by the employer in the course of his business or profession on the use of health club and similar facilities;

Ø 50 % of the expenses incurred or payment made by the employer in the course of his business or profession on the use of any other club facilities;

Ø 50 % of the expenses incurred or payment made by the employer in the course of his business or profession on gifts, and

Ø 50 % of the expenses incurred or payment made by the employer in the course of his business or profession on scholarships.

For the purpose of the Fringe Benefit Tax , the value of fringe benefit shall be the aggregate of the followings :-
(a) the cost of the free ticket or concessional ticket provided by the employer for private journey of his employees or their family members, calculated on the basis of which it is provided to the general public and reduced by the amount, if any, paid by or recovered from the employees, and
(b) the actual amount of contribution by the employer to an approved superannuation fund for employees, and
(c) the aggregate amount of the abovesaid deemed fringe benefits.

The Bill states that the tax shall be paid by the employer on the value of the fringe benefits which shall be deemed to have been provided by an employer. However, those perquisites which are directly attributed to the employees, will continue to be taxed in their hands as per the existing provisions and method of valuation.

The Employer, for the purpose of Fringe Benefit Tax means-
• a company;
• a firm;
• an association of persons or a body of individuals, whether incorporated or not, but excluding any fund, trust, institution eligible for exemption U/s 23( c ) of Sec.10 or registered U/s 12AA of The Income Tax Act, 1961.
• A local authority; and
• Every artificial juridical person, not falling within any of the precding sub-clauses.
[Individual and Hindu Undivided Family engaged in business or profession has been omitted from the purview of the Fringe Benefit Tax.]

Payment of Taxes :
The employer is required to pay tax on the value of fringe benefits at the rate of 30% and surcharge at the rate of 10% and also education cess of 2%. This FBT is to be paid in advance in four quarterly installments. Every employer shall be required to compute the total value of fringe benefit for each quarter and calculate the tax thereon and deposit the same within 15 days following such quarter. However the tax payable for the quarter ending 31st March shall be payable on or before the 15th day of March. Every employer shall be required to file a separate return of fringe benefit and this return is to be filed before the due date prescribed for filing the return of income U/s 139(1) of the Income Tax Act, 1961. The assessment and penalty proceeding shall be same as that of income tax. All the provisions of the Income Tax Act regarding return filing, assessment and reassessment of Income Tax shall apply accordingly to the Fringe Benefit Tax.









Global status of Fringe Benefit Tax:-
In most of the countries the fringe benefits are taxable in the hands of the employee. However in Australia all the fringe benefits are taxable in the hands of employer. In Australia, tax on all fringe benefits, not only fringe benefits of common use, is payable by the employer on the grossed up value, i.e. fringe benefits provided to employees plus tax payable. As the tax is charged on the grossed up value of perquisites, the tax so paid is allowed as deduction to the employer.
In UK, some perquisites are taxable in the hands of highly paid employees.
In Malaysia, the fringe benefits are taxable in the hands of employee and the value is limited to the amount of expenses incurred by the employer i.e. cost to the employer less by any contribution by employee.
Thus the analysis of the provision of Fringe Benefits tax in selected countries leads to the following conclusions:-
· In most of countries the Fringe Benefit is still taxable in the hands of employees.
· In Australia, all the Fringe Benefits are taxable in the hands of employer. No FBT is taxable in the hands of the employees.
· The types of benefits such as advertising, entertainment, and sales promotion are basically business expenditure and not fringe benefits.
· The inclusion of contribution to superannuation fund is illogical and even in Australia, such contribution is exempt from tax.

Fringe Benefits in Indian Context- An Elucidation :-
The issues which need focus and deliberation are:-
1. FBT is an additional tax which has been provided independently under Sec. 115W to 115 WL. It has independent provisions of filing of return, assessment, payment of tax etc.

2. There is a 30% tax rate across the board, irrespective of the income of employees or assessee.

3. The FBT will be levied on the expenditure debited in the books, irrespective of the number of employees- whether it is one or more.

4. In case of recovery of some amount from the employees, the FBT will be calculated without considering the recovery. It is charged on the amount debited in the books of accounts.

5. There is double taxation in some cases, like some expenditure are disallowed while computing the business income on account of being personal nature, then the employer will have to pay double tax on the same amount. Firstly as FBT on the amount debited and then tax on the disallowed expenditure in assessment.

6. Some expenditures, as defined in Sec. 115WB(2), require some proper definition and clarification. Otherwise it will cause an extensive litigation to explain their meanings.

7. In certain cases, the provisions may lead to encourage the incurring the expenditure out of books.

8. Multiplicity of assessment- now the assessee will be subjected to four types of assessment i.e. Regular Tax Assessment, Transfer Pricing Assessment, Fringe Benefit Tax Assessment, Banking Cash Transaction Tax Assessment. It unnecessary put an asessee to hardship and makes him spend his valuable time in appearing before the assessing authority. This will lead to lot of controversy, lot of appeals, lot of trips to Income Tax Office. This will also give arbitrary power to the assessing officer.

9. The concept of ‘Pay as You Earn’ is loosing its meaning and the Income Tax is becoming like Indirect tax.

10. The provision can not be considered as a move towards simplification of tax laws. The proposed scheme will make the law more complicated and increase the burden on the employer as well as income tax department.
VALUATION OF PERQUISITE RULES (Revised)
[Vide Notification No.68/2005 dt.28/02/2005]

Finance Minister P.Chidambaram presented the Finance Bill, 2005 and in that bill he proposed to introduce a new tax called Fringe Benefit Tax. This Finance Bill proposed to introduce a complete code for the taxation of Fringe Benefits. There will be separate return for Fringe benefit tax and a separate assessment and reassessment of the same.

Before the presentation of the Finance Bill 2005, the Income Tax Act, 1961 contains the provision for the taxation of perquisites and fringe benefits in the hands of employees. Section 15 of the Act deals with the taxation of salary and perquisites in hands of the employee and according to Sec. 17(2) perquisites, amongst other things, includes :
-the value of any benefits or amenity granted or provided free of cost or at
concessional rate to the specified employees,
-any sum paid by the employer in respect of any obligation which, but for
such payment, would have been payable by the assessee and
-the value of any other fringe benefits or amenity as may be prescribed.

But the difficulty arises in the cases where there is a collective enjoyment of such benefits which are for business purposes and includes, partially, benefit of personal nature. In order to overcome this difficulty, it has been proposed that those perquisites which can be directly attributed to the employees will continue to be taxed in their hands as per the existing provisions and method of valuation. However, where it is not possible to tax the benefits provided in the hands of the employees, this new fringe benefit tax shall be levied on the employer on the value of such benefits deemed to have been provided to the employees.

Introduction of Fringe Benefits taxation, in the hands of employer, in a separate chapter in the Finance Bill, 2005 has the implication on Rule 3 of the Income Tax Rules, 1962, which deals with the method of valuation of perquisites and fringe benefits and consequently new valuation rules has been notified by the CBDT vide Notification No.68/2005 on 28th February, 2005. The notification substituted some of the sub-rules of Rule 3 and omitted some of the sub-rules which was not required due to its inclusion in the provisions of Fringe Benefit Tax. Here are the point by point discussion on the new Perquisite Rules.

Rule 3(1) : Valuation of Residential Accommodation
Table I has been substituted and the valuation of residential accommodation in the circumstances where the accommodation is provided by employer other than the Union or State government and the accommodation is owned by the employer then the valuation shall be 20 % ( substituted for 10% ) of salary in cities having population exceeding 4 lacs and in other cities 15 % (substituted for 7.5 %) of salary. Further if the accommodation is provided by the employer other than Union or State government and the accommodation is taken on lease or rent by the employer then the valuation of perquisites in such residential house shall be the actual amount to lease rental paid or payable or 20 % (substituted for 10%) of salary whichever is lower as reduced by the rent , if any actually paid by the employee.

Rule 3( 2) : Value of perquisites in the use of Motor Car
This Rule has been omitted by the abovesaid Notification because, the perquisite value involved in the motor car facility has been now taxed in the hand of employer instead of the employee and will be covered in the provision of Fringe benefit taxation. According to the newly introduced Section 115WB the fringe benefit shall be deemed to have been provided if the employer has, in the course of business or profession, incurred any expense or made any payment for repair, running and maintenance of motor cars. An amount equal to 20% of such expenditure shall be deemed as fringe benefit and shall be taxed at 30% in the hand of the employer.

Rule 3 (6) : Personal or private journey provided by any undertaking engaged in the carriage of passengers or goods free of cost or at concessional rate.
This rule has been omitted by the abovesaid Notification since, the perquisite value involved in such facility has been now covered in the provisions of Fringe Benefit Tax. According to this new Section, fringe benefit, amongst other things, means any free or concessional ticket provided by an employer for the private journeys of the employees and his family members. The value of fringe benefit in this case shall be the cost at which it is provided by the employer to the public as reduced by the amount, if any, paid or recovered from his employee or employees.

Rule 3 (7) : Other Fringe Benefits
Clause (ii) value of traveling, touring, accommodation and any other expenses paid for or borne or reimbursed for any holiday availed of by the employee or any member of his household
This clause has been omitted by the abovesaid Notification as it has been covered in the newly inserted Section 115WB. According to this new section 115WB, fringe benefit includes the conveyance, tour and travel including foreign travel and 20 % of the expenses incurred shall be deemed as fringe benefit to employees and shall be taxed at 30% in the hands of the employer.

Rule 3 (7) : Other Fringe Benefits
Clause (iii) : Value of free meals
This clause is also omitted by the abovesaid notification, as Section 115 WB includes that the fringe benefit shall be deemed to have been provided if the employer has, in the course of his business or profession , incurred any expense on or made any payment for provision of hospitality of every kind to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on or payment for, food or beverages provided by the employer to his employees in office or factory. The deemed value of fringe benefit shall be 50% of the expenses incurred and shall be taxed at 30% in the hands of employer. However in the case of an employer engaged in the business of hotel the deemed value of fringe benefit shall be 5% of the expenses incurred.



Rule 3 (7) : Other Fringe Benefits
Clause (iv) : Value of any gift or voucher or token in lieu of such gifts
This clause is also omitted from the perquisites and fringe benefit rules and the same is now taxed as fringe benefit tax in the hands of the employer. The new Section 115WB states that the fringe benefit shall be deemed to have been provided if the employer has, in the course of his business or profession, incurred any expense on or made any payment for gifts and according to Section 115WC an amount equal to 50% of the expenses shall be deemed as fringe benefit and shall be taxed at 30% in the hands of the employer.

Rule 3 (7) : Other Fringe Benefits
Clause (v) : Membership fees and Annual fees which is charged to a Credit Card provided by the employer or otherwise paid or reimbursed by the employer
This clause is also omitted from the perquisites and fringe benefit rules and the same is now taxed as fringe benefit tax in the hands of the employer. The new Section 115WB states that the fringe benefit means any reimbursement, directly or indirectly, provided made by the employer to his employees for any purpose.

Rule 3 (7) : Other Fringe Benefits
Clause (vi) : Payment or reimbursement of any expenditure incurred in a club by the employee or by any member of his household
The new perquisite rule does not contain this clause , because it has been covered in the new Section 115WB which states that the fringe benefit shall be deemed to have been provide if the employer has, in the course of business or profession, incurred any expenses or made any payment for use of club facilities or for use of health club, sports and similar facilities. According to Section 115WC an amount equal to 50 % of expenses incurred on the abovesaid , shall be deemed to be fringe benefit and shall be taxed in the hands of employer at 30% .

Rule 3 (8) : Value of any other benefit or amenity, service, right or privilege.
This rule has been omitted by the abovesaid Notification since, the perquisite value involved in such benefit or amenity, service, right or privilege has been now covered in the provisions of Fringe Benefit Tax. According to this new Section 115WB, fringe benefit means any privilege, service, facility or amenity, directly or indirectly, provided by his employer to his employees and now it shall be taxed in the hands of employer at the rate of 30%.


In a nut shell, it can be said that those perquisites, amenities, benefits or facilities which can not be attributed directly to the employees shall now be taxed as fringe benefit tax in the hands of the employer and such perquisites, amenities, benefits or facilities shall now be withdrawn from the Rule 3 of Income Tax Rules, 1962 to exclude any type of double taxation. The new Rule 3 only consist of methods of valuation of those perquisites which can be attributable to the individual employee and which can be taxed in the hands of employee itself.