Accounts Notes: Fringe Benefit Tax

Finance Act’ 2005 has adopted a bifacial approach for the taxation of fringe benefits:
1. Perquisites which can be directly attributed to the employees:

Such perks will continue to be taxed in the hands of the employees in accordance with the existing provisions of section 17(2) and subject to rule 2A, 2B and 2BB, which have been dealt in a detailed manner under the head perquisites of the salaries module.
2. Perquisites which cannot be directly attributed to the employee or where because of practical impossibilities it is not feasible to tax the benefits in the hands of the employee:

Where it is not possible to tax the benefits on account of non feasibility/ practical problems to tax benefits the Fringe Benefit Tax comes into picture. This tax has to be paid by the employer on the value of such benefits provided or deemed to have been provided to the employees.
WHAT ARE FRINGE BENEFITS?

Fringe benefits and benefits in kind (also called employee benefits, perquisites, or perks) are various non-wage compensations provided to employees in addition to their normal wages or salaries. Where an employee exchanges (cash) wages for some other form of benefit, this is generally referred to as a 'salary sacrifice' arrangement.

Fringe benefits can also include but are not limited to: (employer-provided or employer-paid) housing, group insurance (health, dental, life etc.), income protection, retirement benefits, daycare, tuition reimbursement, sick leave, vacation (paid and non-paid), funding of education, and other specialized benefits. The purpose of the benefits is to increase the economic security of employees.

The term perks is often used colloquially to refer to those benefits of a more discretionary nature. Often, perks are given to employees who are doing notably well and/or have seniority. Common perks are company cars, hotel stays, free refreshments, and entertainment & leisure activities on work time, free meal coupons, usage of motorcars and aircrafts, conveyance tour & travel expenses and latest addition being Employee Stock Option Plan

WHY FRINGE BENEFIT TAX?
Fringe Benefits Tax (FBT) is the taxation of most, but not all fringe benefits, which are generally non-cash employee benefits. The rationale behind FBT is that it helps restore equity and fairness to those employees who do not receive such benefits, and allows the Central Government to more fairly assess taxpayer entitlement to government benefits, or liability to government taxes or levies
OBJECTIVE
The taxation of perquisites or fringe benefits is justified both on grounds of equity and economic efficiency. When fringe benefits are under-taxed, it violates both horizontal and vertical equity. A taxpayer receiving his entire income in cash bears a higher tax burden in comparison to another taxpayer who receives his income partly in cash and partly in kind, thereby violating horizontal equity. Further, fringe benefits are generally provided to senior executives in the organization. Therefore, under-taxation of fringe benefits also violates vertical equity. It also discriminates between companies which can provide fringe benefits and those which cannot thereby adversely affect market structure. However, the taxation of fringe benefits raises some problems primarily because –
a. All benefits cannot be individually attributed to employees, particularly in cases where any benefit is collectively enjoyed;
b. As per the present widespread practice of providing perquisites, wherein many perquisites are disguised as reimbursements or other miscellaneous expenses so as to enable the employees to escape/reduce their tax liability, the inherent difficulty lies in identification and valuation of such benefits
BASIS OF CHARGE
Basis of Charge of Fringe Benefit Tax is defined under Section 115WA (1) of the Income Tax Act’ 1961, the summarization of which can be done as under:
• Fringe Benefit Tax is payable with effect from assessment year 2006-07 by an Employer on specified fringe benefit (s) provided or deemed to have been provided to it’s employees;
• Fringe Benefit Tax is payable in addition to the income tax charged under the Income Tax Act’ 1961;
• For charging FBT to an employer there should be at least one employee in the employer concern
DEFINITION OF ‘EMPLOYER’ FOR LEVY OF FRINGE BENEFIT TAX
1. Company;
2. Firm ;
3. An AOP or BOI whether incorporated or not;
4. A local authority;
5. Every artificial juridical person not falling under any clauses from (1) to (4) as stated above.
However following have been specifically exempted from the purview of Fringe Benefit Tax:
• An Individual;
• A Hindu Undivided Family (HUF);
• A person eligible for exemption under section10 (23C) or registered under section 12AA of the Income Tax Act’ 1961; and
• A Political party registered under Section 29A of the Representation of the People Act’ 1951

FRINGE BENEFIT TAX IS PAYABLE EVEN IN ABSENCE OF TAXABLE INCOME
The law as stated in Section 115WA (2) has an overriding effect which specifies that even if no income tax is payable by an employer on his total income computed in accordance with the provisions of the Act, Fringe Benefit Tax shall be payable by such employer.

Thus FBT has to be paid by all those employers who fall within the definition of employer although such employer may not be liable to pay income tax on his total income. Hence even Loss making concerns will have to pay fringe benefit tax although no income tax is payable by them.
An employer who is eligible for deduction under section 10A, 10B and 10BA shall also be liable to pay fringe benefit tax in spite of the fact that he is allowed deduction/ exemption under the aforesaid sections

WHAT IS LIABLE TO FRINGE BENEFIT TAX?
The tax base for the purposes of FBT is the value of fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year. The determination of the tax base comprises three elements:
a. The scope of the term ‘fringe benefits provided’;
b. The scope of the term ‘fringe benefits deemed to have been provided’; and
c. The basis of valuation of (a) and (b)
It is based on the Presumptive method applied to certain heads of expenditure as a measure/indicator of fringe benefits.

(A) The scope of the term ‘fringe benefits deemed to have been provided’
o Any privilege, service, facility or amenity, directly or indirectly, provided by an employer, whether by way of reimbursement or otherwise, to his employees (including former employee or employees); [For more details refer clauses (A) to (Q) in HOW TO IDENTIFY EXPENSES LIABLE FOR FBT head in the adjacent index]
(B) The scope of the term ‘fringe benefits provided’
 Any free or concessional ticket provided by the employer for private journeys of his employees or their family members; and
 Any contribution by the employer to an approved superannuation fund for employees;
 Any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees, [including ex- employee(s)], wherein:
1. SPECIFIED SECURITY means the securities as defined in Section 2(h) of the Securities (Regulation) Contract Act’ 1956 and includes Employees Stock Option.
2. SWEAT EQUITY SHARES means equity shares issued by a company to its employees/ directors at a discount or for consideration other than cash for providing know how or making available intellectual property rights or value additions by what ever name called.

(C) The basis of valuation of (a) and (b):
o A specified percentage of each of the expenses enumerated as items (A) to (P) in the earlier paragraph. In case of the items (A) to (K), the specified percentage is 20%, for items (L) to (P) it is 50% of the expenses referred to therein and for (Q) it is 5%, subject to the exceptions specified
FRINGE BENEFIT TAX RATE
• Fringe Benefit Tax shall be payable at the rate of 30% of the Value of Fringe Benefits computed in the manner as shown in VALUATION OF FRINGE BENEFITS: SECTION 115WC.
• Surcharge on Gross Tax Liability @ 10% in case of Domestic Company/ Firm is leviable if the Total Income exceeds Rs. 10 Lakhs.
• Basic Education Cess @ 2% plus Secondary Higher Education Cess @ 1% will be applicable on the Tax Liability calculated including Surcharge.
• So effective tax rates in case of Domestic Company/ Firm will be:-
If Total Income exceeds Rs. 10 Lakhs Domestic Company 30% + 10% + 2% +1% 33.99%
Partnership Firm 30% + 10% + 2% +1% 33.99%
If Total Income is up to Rs. 10 Lakhs Domestic Company 30% + 2% +1% 30.90%
Partnership Firm 30% + 2% +1% 30.90%

HOW TO IDENTIFY WHICH EXPENSES ARE LIABLE TO FBT?
In many practical situations many perquisites to employees are disguised as reimbursements or other miscellaneous expenses so as to enable employees to escape/reduce the tax liability on their real income.

Hence the CBDT in its explanatory circular has specified the ‘PRESUMPTIVE METHOD’ to identify such disguised payments to employees.

Under this method, the Fringe Benefit Tax base can be estimated on a presumptive basis by using certain indicators like sales, number of employees, number of cars, number of houses, certain items of expenses, etc. Such a method has the virtue of simplicity, minimum disputes, low compliance cost, and less administrative burden. Accordingly, the scope of the term ‘fringe benefits deemed to have been provided’ is defined in Section 115WB (2) so as to provide that fringe benefits shall be deemed to have been provided by the employer if he has incurred any expense on, or made payment for, the purposes summarized below:-
A. Entertainment;
B. Provision of hospitality of every kind to any person, whether by way of food or beverages or in any other manner excluding food or beverages provided to the employees in the office or factory or non transferable paid vouchers usable only at eating joints or outlets;
C. Conference excluding fee for participation by the employees in any conference;
D. Sales promotion including publicity but excluding specified expenditure on advertisement;
E. Employee welfare excluding any expenditure or payment made to fulfill any statutory obligations or mitigate occupational hazards or provide first aid facilities in the hospital or dispensary run by the employer;
F. Conveyance tour and travel (including foreign travel);
G. Use of hotel, boarding and lodging facilities;
H. Repair, running (including fuel) and maintenance of motorcars and the amount of depreciation thereon;
I. Repair, running (including fuel) and maintenance of aircrafts and the amount of depreciation thereon;
J. Use of telephone (including mobile phone) other than expenditure on leased telephone lines;
K. Maintenance of any accommodation in the nature of guest house other than accommodation used for training purposes;
L. Festival celebrations;
M. Use of health club and similar facilities;
N. Use of any other club facilities;
O. Gifts;
P. Scholarships; and
Q. Tour and Travel (including foreign travel)

The method of computation of the value of ‘fringe benefits provided or deemed to have been provided’ for purposes of levy of the FBT is provided for in Section 115WC (1). Hence, the value of the fringe benefits provided or deemed to have been provided in a previous year by an employer to its employee(s) shall be the aggregate of:-
I. Cost of free or concessional ticket for private journeys of the employees or their family members as provided by the employer to the general public as reduced by the amount, if any, paid by, or recovered from, his employee or employees;
II. The actual amount of contribution made by the employer to an approved superannuation fund for the employees;
III. Any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees, [including ex- employee(s)];
IV. A specified percentage of each of the expenses enumerated as items (A) to (P) in the earlier paragraph. In case of the items (A) to (K), the specified percentage is 20%, for items (L) to (P) it is 50% of the expenses referred to therein and for (Q) it is 5%, subject to the following exceptions:-
i. Where the employer is engaged in the business of hotel, a lower rate of 5% of the expenses incurred on hospitality have been specified for purposes of calculating the liability under the FBT;
ii. Where the employer is engaged in the construction business, 5% of the expenses in the nature of conveyance, tour and travel (including foreign travel) have been specified;
iii. In the case of an employer engaged in the manufacture or production of pharmaceuticals or computer software, the value of fringe benefit under the heads conveyance, tour and travel (including foreign travel) and use of hotel, boarding and lodging facilities is restricted to 5% of such expenses;
iv. Where the employer is engaged in the carriage of passengers or goods by motor car, a lower rate of 5% of expenses on repair, running (including fuel) and maintenance of motor cars and depreciation thereon has been specified;
v. In the case of an employer engaged in the carriage of passengers or goods by aircraft/ ship, the value of fringe benefits would be valued as:
• Under the head expenses on repair, running (including fuel) and maintenance of aircrafts and depreciation shall be ‘NIL’;
• Under the head expenses incurred on Hospitality shall be 5%;
• Under the head expenses incurred on Hotel, Boarding and Lodging facilities shall be 5%.
PLEASE NOTE:
• The law makes a clear distinction between Fringe benefits that will continue to be taxed in the hands of the Employees and Fringe Benefits on which FBT is payable by the Employer, hence while bifurcating the expenses incurred by the employer in a previous year it is very important that the categorization of expenses incurred is done as specified above considering the proximate purpose of the expenses incurred.
• There exists a specific difference between Fringe Benefits actually provided and Fringe Benefits deemed to have been provided (as dealt above), hence in no case the valuation basis of the specified fringe benefits can change to any other method as specified above.
• It does not make any difference whether the expenses incurred on which FBT is chargeable has been capitalized in the books of accounts, the FBT would still be chargeable on such expenses incurred. This fact corrects the wrong notion that in case of capitalized expenses FBT is not applicable. For e.g., Mobile phone purchased capitalized in books but still chargeable to FBT;
• FOR DETAILED DISCUSSION ON VALUATION OF FRINGE BENEFITS ACTUALLY/ DEEMED TO BE PROVIDED REFER INDIVIDUAL CLAUSES SEPARATELY REFERRED TO IN THE ADJACENT INDEX