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Fringe Benefit Tax

Written by: Nimitha Salim, Semester VIII (4th Year), NUALS, Cochin, Kerala
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The Finance bill, 2005 has introduced Chapter XII-H providing for the levy of Income-tax on fringe benefits offered by employers to their employees. The Finance Minister Mr. P. Chidambaram while presenting the budget in the year 2005 had made the statement that ‘I have looked in to the present system of taxing the perquisites and I have found that many perquisites are disguised as fringe benefits and escape tax. Neither the employer nor the employee pays any tax on these benefits, which are certainly of considerable material value.

At present where the benefits are fully attributable to the employee they are taxed in the hands of the employee: the position will continue. He also justifies that this tax has to continue to provide equity in taxation in this year while moving the Finance Bill 2006. The Fringe Benefit Tax is a tax on expenditure incurred by employers on their employees and thus strictly speaking does not constitute a tax on income. It is for consideration whether the cost of the fringe benefits which constitutes the tax base should be deemed to be income under the Income-tax Act. A similar provision is contained in section 115JB.

The concept of presumptive taxation has become the order of the day. The fringe benefit tax was tackled to a certain amounts in the hands of the employees by way of valuation of perquisites using certain elements of presumption. The Finance Act 2005 covers the concept of taxation of fringe benefits in the nature of personal elements in the hands of the employer. The Amendments carried out by the Finance Act 2006 gave certain relief to a group of employers.

Fringe Benefit Tax [Section 115w (B)]

“Fringe Benefit Tax” or “Tax” means the tax chargeable under section 115WA.
Fringe Benefit Tax helps in eliminating discretion. Under FBT, scope for evasion is very very limited. FBT will increase effective rate of corporate tax by 1 to 1.5%. FBT is one method of requiring corporates to pay a little more tax.

The Fringe Benefit tax is a tax to be paid by an employer in addition to the income tax payable for every assessment year starting from the assessment year 2006-07. the tax is to be paid in respect of the fringe benefits provided or deemed to have been provided by an employer to his employees. The liability to pay Fringe Benefit Tax shall be there even when there is no liability to pay income tax by an employer. Accordingly, all those who fall within the definition of employer shall be required to pay tax on the fringe benefits provided to the employees irrespective of the fact that income, which an employer is earning, is exempt under the Income Tax Act or there is a loss. Accordingly, those entities which are claiming exemption under Section 10 such as mutual funds, undertakings in free trade zone claiming exemption under Section 10A, export-oriented units claiming exemption under Section 10B or Section 10BA, shall be liable to pay Fringe Benefit Tax. The Fringe Benefit Tax is a liability of the tax of the employees to be born by the employer. That is why even loss making entities and entities whose income is exempt shall also be required to pay Fringe Benefit

Fringe Benefits [Section 115wb (1) And (2)]

As per section 115 WB [1] – Means Benefits, any consideration provided for employment
1. Any privilege, service, facility or amenity directly or indirectly provided by an employer whether by way of reimbursement or to his employees [including former employee or employees] and

2. Any free or concessional ticket provided by the employer for Private journey of his employees or their family members and

3. Any Contribution by the employer to an approved Super annuation fund for employees. The above definition of fringe benefits consists of three clauses. Clauses (b) and (c) are specific cases of fringe benefits.

Further, as per Section 115WB (2), the fringe benefits shall be deemed to have been provided if the employer has incurred any expense or made any payment for the purposes of (a) entertainment; (b) festival celebrations; (c) gifts; (d) use of club facilities; (e) provision of hospitality of every kind to any person whether by way of food and beverage or in any other manner, excluding food or beverages provided to the employees in the office or factory;(f) maintenance of guest house; (g) conference; (h) employee welfare; (i) use of health club, sports and similar facilities, (j) sales promotion including publicity; (k) conveyance tour and travel including foreign travel expenses; (l) hotel boarding and lodging; (m) repair, running and maintenance of motor cars; (n) repair, running and maintenance of aircrafts; (o) consumption of fuel other than industrial fuel; (p) scholarship to the children of the employees.

The taxation of perquisites of fringe benefits provided by an employer to his employees in addition to his cash salary or wages paid is subject to varying treatment in different countries. These benefits are either taxed at the hands of the employees themselves or the value of such benefits is subject to a ‘fringe benefit tax’ at the hands of the employer. The rationale for levying a fringe benefits tax on the employer lies in the inherent difficulty in isolating the ‘personal element’ where there is collective enjoyment of such benefits and attributing the same directly to the employee. So, this is especially where the expenditure incurred by the employer is ostensibly for purposes of the business but includes, in partial measure, a benefit of a personal nature. Moreover, in cases where the employer directly reimburses the employee for expenses incurred, it becomes difficult to effectively capture the true extent of the perquisite provided because of the problem of cash flow in the hands of the employer.

Therefore, it is proposed to adopt a two-pronged approach for the taxation of the fringe benefits under the Income-tax Act. Perquisites, which can be directly attributed to the employees, will continue to be taxed at their hands in accordance with the existing provisions of Section 17(2) of the Income-tax Act and subject to the method of valuation outlined in rule 3 of the Income-tax Rules. In cases, where attribution of the personal benefits poses problems, or for some reasons, it is not feasible to tax the benefits in the hands of the employee, it is proposed to levy a separate tax known as the fringe benefit tax on the employer on the value of such benefits provided or deemed to have been provided to the employees.

Constitutional Validity
Entry 82 of List I of the 7th schedule to the Constitution empowers the Parliament to frame laws to levy taxes on income and not on expenditure. After the decision of A. Sanyasi Rao’s case1 in and Union of India v. Sanyasi Rao2, by the Supreme Court the argument about the validity of this provision may not hold good. The entire system of FBT based on the valuation of specified expenditures incurred by the taxpayers irrespective of the allowability to be considered under the regular assessment. This fringe benefit tax is a tax on the expenditure incurred instead of income earned.

The sections 44AD, 44AF and 44AE are in the statute book with the intention to tax the income on presumptive basis where the tax payers are not maintaining the books of account. The taxpayers can declare lower income provided that they maintain the books of accounts and get their account audited u/s 44AB. The taxpayers are given options to choose their presumptive taxation or maintain the books of accounts, as per the law for regular computation. Thus this concept of presumptive taxation is different from the present mode of taxation of fringe benefits.

The Chapter XII H provides presumptive taxation on the fringe benefits enjoyed by the employees and deemed fringe benefits enjoyed by everybody. This chapter is a separate enactment within the income tax Act, which provides for total compartmental system of tax computation, assessments, recoveries, appeals, interest payments etc. the chapter XII-H with section 115W to section 115WL would cover the total tax system of FBT. Now the question can be raised as to whether the basic concept of FBT is applicable for the expenses incurred for and on behalf of employees alone of for others also.

The finance minister has assured that the genuine business expenditure will not be hit by the FBT. But unfortunately no such remedy is available in the Act.

Rationale For Levy

The need for introducing fringe benefits tax on the employer arose on account of the inherent difficulty in identifying the personal element’ where there is collective enjoyment of certain perquisites, amenities & benefits and attributing the same directly to the employee. This is so specially where the expenditure incurred by the employer is ostensibly for purposes of the business but inherently includes, at least partially, the benefit of a personal nature. Moreover, in cases where the employer directly reimburses the employee for expenses incurred, it becomes difficult to effectively capture the true extent of the perquisite provided because of the problem of cash flow in the hands of the employer.

Under the proposed provisions, fringe benefit tax is payable by an employer who is either an individual or a Hindu undivided family engaged in a business or profession; a company; a firm; an association of persons or a body of individuals; a local authority; or an artificial juridical person. The fringe benefit tax is payable by the employer even where he is not liable to pay Income-tax on his total income computed in accordance with the provisions of this Act.
Implications – Difficulties.

The apparent contradiction in legislative intent and proposed provision would lead to litigation.

The issues which need focus and deliberation are the following:-
# It is an independent or additional tax with independent provision of filing the return, assessment, payment of tax. The chapter XII H is complete code for this.

# The tax is impossible even where assessee does not have taxable income, but expenditure are incurred in course of business.

# Even charitable institution carrying incidental business without profit motive will also be required to pay tax.

# The tax rate is 30% irrespective of the level of remuneration of employees or income of assessee.

# Purpose of expenditure i.e. entertainment, gift, conveyance etc. will cause a lot of litigation to explain their meanings.

# The levy of tax may be even where the number of employees is one or more.

# Where the expenditure is disallowed on the allegation of personal nature, this can again be taxed under this section.

# Even where part of expenditure mentioned in section 115WB (2) is recovered, the deemed fringe benefit would be a proportion of gross amount debited in the books without allowing credit.

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

# In order to reduce likely litigation and make the provisions more effective, the following suggestion could be of some help:-
# The rate of fringe benefit tax should be moderate e.g. 15% or at the most 20%.
# The provision should not apply where the employer employs less than 20 persons to avoid its application across the board.
In case of separate disallowance out of the expense concerned in assessment to fringe benefit should not be taken to that extent.
# The recovery out of expenses should be reduced from the amount of fringe benefits.
# The proportion of expenses to be regarded, as fringe benefit should be linked to the number of employees.
# Instead of an independent return, assessment order and other proceedings, it should be part of the same return, assessment order, appellate procedure etc. to avoid procedural and litigation cost.

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