Fringe Benefit Tax (Full Details)

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What is fringe benefit tax?The imposition of fringe benefit tax that proposes to tax companies on perquisites provided to their employees by Finance Minister P Chidambaram in his recent Budget has sparked off a huge debate amongst corporate and tax circles.

Fears have been aired that many an industry will be badly hit by the fringe benefit tax and act as a barrier to their growth and well being.

So just what is fringe benefit tax?

The taxation of perquisites -- or fringe benefits -- provided by an employer to his employees, in addition to the cash salary or wages paid, is fringe benefit tax.

Any benefits -- or perks -- that employees (current or past) get as a result of their employment are to be taxed, but in this case in the hands of the employer.

This includes employee compensation other than the wages, tips, health insurance, life insurance and pension plans.

Fringe benefits as outlined in section 115WB of the Finance Bill, mean any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment.

They also include reimbursements, made by the employer either directly or indirectly to the employees for any purpose, contributions by the employer to an approved superannuation fund as well as any free or concessional tickets provided by the employer for private journeys undertaken by the employees or their family members.

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What are these fringe benefits that will be taxed?

As per the Finance Bill, 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 aircraft;
(o) consumption of fuel other than industrial fuel;
(p) use of telephone;
(q) scholarship to the children of the employees.

In cases where the employer is engaged in the business of carriage of passengers or goods by motor car or by aircraft, a lower percentage of expenses on repair, running and maintenance of motor cars or aircrafts or fuel expenses has been specified.

Similarly, for hotels, a lower percentage of the expenses incurred on hospitality has been specified for purposes of calculating the liability under the fringe benefit tax.

An employer liable to pay fringe benefit tax is required to furnish a return of fringe benefits before the due date as given in section 115WD.

Section 115WE outlines the procedure for the assessment of the return of fringe benefits filed by the employer and the determination of tax or interest payable or refund due and in either case the issue of intimation to that effect.

Who pays fringe benefit tax?

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; a sole trader, or an artificial juridical person.

The tax is payable in respect of the value of fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year.

The value of fringe benefits so calculated, is subject to additional income tax in respect of fringe benefits at the rate of thirty per cent, as provided in section 115WA.

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 other provisions of this Act.

The benefit does not have to be provided by the employer directly for him to attract fringe benefit tax. fringe benefit tax may still be applied if the benefit is provided by a third party or an associate of the employer or by under an arrangement with the employer.

Why fringe benefit tax?

The taxation of perquisites -- or fringe benefits -- provided by an employer to his employees, in addition to the cash salary or wages paid, is subject to varying treatment in different countries.

These benefits are either taxed in the hands of the employees themselves or the value of such benefits is subject to a 'fringe benefit tax' in the hands of the employer.

The rationale for levying a fringe benefit 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.

This is so 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, the finance minister has proposed to adopt a two-pronged approach for the taxation of fringe benefits under the Income-tax Act.

Perquisites which can be directly attributed to the employees will continue to be taxed in 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 benefit 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.

For this purpose, a new Chapter XII-H is proposed to be inserted in the Income-tax Act containing sections 115W to 115WL, which provides for the levy of additional income tax on fringe benefits.

The chapter is divided into three parts. Part A contains the meaning of certain expressions used, part B enumerates the basis of charge, and part C delineates the procedures for filing of return in respect of fringe benefits, assessment and the payment of tax thereon.

Will phone bills invite fringe benefit tax?
Yes. For telephone expenses, the finance minister assumes that 10 per cent of all calls made from an office is by employees for personal reasons, while for fuel, the extent of use by employees has been taken at 20 per cent.

However, there is some talk that the fringe benefit tax on telephone expenses may be 'reworked'.

How will the fringe benefit tax be calculated?

The value of fringe benefits shall be the aggregate cost incurred. That is, the total expense deducted will be considered for purposes of levying fringe benefit tax. From this, a certain percentage will be deducted. The difference therein will be taxed at the rate of 30%.

However, the fringe benefit tax rate varies from 10 per cent to 50 per cent depending upon the expense incurred: For example, for the use of telephones 10 per cent fringe benefit tax will be charged, while entertainment expenses, festival expenses, gifts, use of club facilities, etc will be taxed at the rate of 50 per cent.

Will housing perks be affected too?
The department of revenue has notified changes in the income tax rules that double the taxable income of private sector employees on account of housing perquisites.

The amendments came hours after Finance Minister P Chidambaram proposed the fringe benefit tax on employers in his Budget.

At present, in cities with over 400,000 population, the perquisite value of accommodation for private sector employees to be included in an employee's taxable income is treated as 10 per cent of his salary. This now doubles to 20 per cent.

The changes in the Income Tax Rules, notified by the Central Board of Direct Taxes on February 28, are effective from April 1 2005.

The new rules mean that a person earning an annual salary of Rs 10 lakh will have to fork out an additional Rs 33,660 annually by way of the higher tax on the housing perquisite.

According to tax experts, the housing perquisite value of such a person will now double to Rs 2 lakh. As a result, his tax liability on account of the perquisite will double to Rs 67,320 a year.
For other cities, the perquisite value of accommodation, which was treated as 7.5 per cent of the salary, will now go up to 15 per cent. The value of accommodation is added to the taxable income and income tax is paid at the applicable rate.

What about fringe benefit tax on use of cars, etc?

The tax on perquisites like maintenance of a car, club membership, free meals, credit cards and tours and travel, which were earlier taxed in the hands of the employees, has been withdrawn and the employer will now be liable to pay tax on this. But this may not result in any relief for employees.

In the case of the perquisite value of a car, employees are taxed at a rate ranging between Rs 1,200 (for small cars) and Rs 1,600 a month (for bigger vehicles) in addition to Rs 400 or 600 for a driver provided by the company.

How badly will it hurt corporate India?
Reports suggest that the fringe benefits tax is likely to result in India Inc incurring an additional expenditure of about Rs 25,000 crore.

Will advertising agencies be hit by fringe benefit tax?
The 30 per cent fringe benefit tax will hurt advertising agencies badly as in this sector about 10% to 12% of an employee's salary comes in the form of perks.

In the glamorous world of advertising attending conferences all over the world, wining and dining to network with clients and bag more business, etc is the done thing. Now all these expenses will come under the ambit of fringe benefit tax.

Also, advertising agencies are people-oriented one and staff welfare and salaries account for almost 50 per cent of their expenses. The fringe benefit tax will thus hurt ad agencies badly.

Which other countries levy fringe benefit tax?

Although fringe benefit tax may seem new to India, it's not a novel concept. This tax is already levied in the United States, the United Kingdom, Canada, Australia, New Zealand, Japan and some other nations.

The fringe benefit tax rules proposed in the Budget by the finance minister are modelled on the Australian system. With the only difference that fringe benefit tax is proposed to be taxed at between 10 per cent and 50 per cent in India, whereas in Australia it is taxed at a flat rate of 60%.

In Australia, when you invite your client to a meal what you spend on your own lunch will attract fringe benefit tax, and not what you spend on your client's lunch, which is marked as business expense.

A meal in an in-house canteen or ordered in office is, however, exempted from tax. But reimbursements for a party at home is not.

What is the reaction of India Inc to fringe benefit tax?
India Inc is quite nervous about the proposed fringe benefit tax and feels that the gains from the reduction in corporate tax announced in the last Budget would be nullified by the cut in depreciation rates.

Nearly 70 per cent of the CEOs surveyed in the Associated Chambers of Commerce and Industry's Business Barometer survey were happy with the reduction of the corporate tax from 35 per cent to 30 per cent, while 57 per cent out of them were of the view that the gains from the corporate tax reduction will be nullified because of the cut in the depreciation rates.

Most of the CEOs surveyed said that the impact of the fringe benefit tax would be 'most severe' on Indian enterprises. They argued that advertisement and sales promotion expenses should not be included under fringe benefit tax.

The survey also pointed out that the cash withdrawal tax would be a big blow for small retailers and dealers.

However, 30 per cent of the respondents said that since the surcharge has also been increased from 2.5 per cent to 10 per cent, the overall benefit of the corporate tax reduction was only around three per cent.

Some software firms feel that a wide variety of payments would come under the ambit of fringe benefit tax. A recent survey also said that because of the impact of the fringe benefit tax, companies across sectors are likely to cut down on the increments that employees would get.

The proposal has invited criticism even from the Institute of Chartered Accountants of India, which has otherwise praised the finance minister for rationalising the tax administration.

Will the tax be lowered by the finance minister in view of the widespread opposition to it?

Reports say that the finance ministry is considering reworking the taxable value of the fringe benefits proposed in the Budget. The move follows industry's concern that the present proposals go beyond taxing the collective benefits enjoyed by employees.

The taxable value could be brought down in some cases where the proposed deemed fringe benefits were felt to be high. The reworked fringe benefit tax structure would also define the taxable expenses more clearly so that genuine business expenditure was not taxed.

Will small firms be spared?
A Business Standard report said that the finance ministry is considering a threshold staff strength for levying the fringe benefit tax on employers.

Finance ministry officials indicated that organisations with very few employees could be exempted from the tax. This is based on the assumption that small employers do not spend large amounts on fringe benefits.

The ministry will also examine combining the tax return for fringe benefits with the income tax return to avoid the need for filing separate forms, the report said.