Fringe Benefit Tax - At A Glance

Fringe Benefit Tax - At A Glance

INTRODUCTION

The Finance Act, 2005 has imposed a new tax - The Fringe Benefit Tax (FBT). The provisions relating to this new tax are contained in new Chapter XII-H (sections 115W to 115WL) of the Income Tax Act, 1961 (hereinafter referred to as - the Act-), introduced by the Finance Act, 2005, with effect from 1-4-2006 (i.e., assessment year 2006-07).

RATIONALE BEHIND FRINGE BENEFIT TAX

FINANCE MINISTER’S BUDGET SPEECH (PARA 160)

I have looked into the present system of taxing perquisites and I have found that many perquisites are disguised as fringe benefits, and escape tax. At present, where benefits are fully attributable to the employee they are taxed in the hands of the employee; that position will continue. In addition, I now propose that where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees, they shall be taxed in the hands of the employer. However transport services for workers and staff and canteen services in an office or factory will be outside the tax net. The tax is not a new tax, although I am obliged to call it by a new name, namely, Fringe Benefits Tax. The rate will be 30 per cent from an appropriately defined base.

FINANCE MINISTER'S SPEECH ON 2-5-2005 AT THE TIME OF PASSING THE FINANCE BILL IN LOK SABHA

After the Budget was presented, we have called the three Apex organizations CII, ASSOCHAM and FICCI. We have brought in the Institute of Chartered Accountants. They have gone into international practices. They have examined everything. I have received a report from my officers who consulted them extensively over several days and we have now modified them. We have exempted some of the benefits which we thought were fringe benefits, but which they thought were legitimate business expenditure. We have reduced the base in all but our cases to 20 per cent.

This is a presumptive tax. A presumptive tax is necessary because you have to avoid inventive accounting practices. People can shift the classification of expenditure from one head of account to another. So, if we have presumptive tax and have an exhaustive list of accounting heads and have a uniform base, the scope for evasion is very limited. What we are doing is eliminating the entire discretion. What we are now asking him is to file a tax audit certificate saying according to his auditor these are the expenditures under the various heads included in the new chapter, that the whole chapter be replaced in the amendment. If the tax auditor certifies these are the heads, the officer has no discretion. The income-tax officer has to accept that tax audit certificate unless it turns out to be a patently false certificate. We will accept that certificate of the auditor.

ITEMS WHICH WILL BE TREATED AS DIRECT FRINGE BENEFITs PROVIDED TO EMPLOYEES

ITEMS OF EXPENDITURES WHICH WILL BE TREATED AS DEEMED FRINGE BENEFIT

DEFINITION OF EMPLOYER

Section 115W(a) defines - employer- as under:

From the definition given above, the following points are to be noted-

• Individuals and HUFs are not covered in the definition of - employer. Therefore, individuals and HUFs are not liable to pay FBT.

• Sub-clause (iii) of section 115W(a) excludes funds/trusts/institutions eligible for exemption under section 10(23C) or registered under section 12AA. Hence, such entities are also not liable to pay FBT.

RATES OF TAXES FOR DIFFERENT CATEGORIES OF - EMPLOYERS

DUE DATES FOR PAYMENT OF ADVANCE FB TAX [Section 115WJ(2)]

For Advance Tax Payments no threshold limit has been provided below which no FBT is payable thus even if FBT is Rs. 100, it has to be paid by way of advance tax as above.

DUE DATE OF FILING RETURN OF FRINGE BENEFITs

Return is to be filed and due date is 31 st October for the Company and Audit Assesses and 31 st July for non- audit Assesses.

TAX AUDIT CERTIFICATE

A Tax Audit Certificate will be obtained from the Auditor by the assessee certifying that these are the expenditures under various heads liable to FBT. This certificate shall be accompanied with the return of FBT. The FM has assured in his speech to the House on 2-5-2005 that if the Tax Auditor certifies the heads and expenditures of the FB, the Assessing Officer has no discretion but to accept the certificate unless it turns out to be a patently false certificate. (The Certificate is yet to be notified by the Finance Ministry)

INTEREST ON SHORTFALL OR NON-PAYMENT OF ADVANCE TAX

Section 115WJ(3) provides that where an assessee, has failed to pay the advance tax for any quarter or where the advance tax paid by him is less than thirty per cent of the value of fringe benefits paid or payable in that quarter, he shall be liable to pay simple interest at the rate of one per cent on the amount by which the advance tax paid falls short of, thirty per cent of the value of fringe benefits for any quarter, for every month or part of the month for which the shortfall continues.

Thus, if the advance tax paid falls short of 30% of the value of FBs paid or payable in that quarter or he fails to pay the advance tax for any quarter, the assessee is liable to pay simple interest at the rate of 1% for every month or part thereof of the shortfall or amount not paid till the shortfall continues. [Section 115WJ(3)]. This will be the case even for the quarter ended 31 st March for which one has to pay advance tax even before the quarter ends on 15 th of March itself and where estimation is involved.

However no interest or penalty shall be levied for the 1 st quarter of 2006 if the payment is made on or before 31 st August, 2005.

PENALTY FOR DELAYED FILING OF FB RETURN

Newly introduced section 271FB provides that if FBT return is not furnished on or before the due date prescribed under section 115WD, the employer shall pay a penalty of Rs. 100 every day during which the failure continues.

MAJOR / MINOR HEADS UNDER FRINGE BENEFIT TAX

For the purpose of accounting Comptroller General of Accounts has approved the following new Major/ Minor heads for FBT

Major Head 0026 Fringe Benefit tax

Minor Heads 101 - Collections under FBT

102 - Penalty

103 - Interest

104 - Surcharge

500- Receipt awaiting transfer to other Minor Heads

504 - Education Cess

800 - Other Receipts

901 - Share of net proceeds assigned to States

LIST OF EXPENSES WHICH ARE NOT SUBJECT TO FBT

Following are some of the expenses, which are not subject to FBT:

1. Contribution to provident fund &ESI & otherfunds

2. Contribution to Gratuity fund

3 Canteen expenses.

4. Medical Center Expenses \ first aid center

5. Executive mess expenses

6 Fire service to mitigate occupational hazard

7. Refreshment

8. Delegate Fees \ Conference Fees

9. Retirement Benefit \ Death Relief fund

10. Uniforms

11. Medical Reimbursement (if fully included in employee's salary and exemption is given as per first proviso to section 17(2).

12. Electricity Reimbursement (if fully included in employee's salary)

13. Mediclaim Insurance (if fully included in employee's salary and deduction is given as per section 80D.

14. Conveyance Allowance (if fully included in employee's salary and deduction is given as per section 10(14).

15. Soft Furnishing allowance (if fully included in employee's salary)

16. Non - Canteen Lunch allowance (if fully included in employee's salary)

17. House Rent allowance (if fully included in employee's salary and deduction is given as per section 10(13A)

18. Education allowance (if fully included in employee's salary and deduction given as per section 10(14)

19. Attendance \ Amenities allowance (if fully included in employee's salary)

20. Provision of A\C, Refrigerator, etc. in employee's house (if perquisite value is fully included in employee's salary)

21. Performance incentives (if fully included in employee's salary)

22. Leave Travel Assistance (if fully included in employee's salary and deduction is given as per section 10(5)

23. Leave Salary (if fully included in employee's salary and deduction is given as per section 10(10)

LIST OF EXPENSES WHICH ARE SUBJECT TO FBT

Following are some of the expenses, which are subject to FBT

1. Group Insurance

2. Personal Accident Insurance

3. Conference expenses

4. Travelling expenses

5. Conveyance expenses

6. Recreation Club Expenses

7. Education tours\Safety Course

8. Family allowance

9. Reimbursement of Entertainment expenses

10. Reimbursement of Salary Paid to Personal driver

11. employee's Telephone Expenses

12. Expenditure & Depreciation on Motor car provided to employees

13. Republic Day Expenses

14. Festival expenses- Deepawali etc

15. Club subscription

16. Gifts to Employees

17. Scholarship to Employees

18. Contribution to Superannuation Fund

OTHER POINTS