27 April 2008
The Central Board of Direct Taxes has issued a circular clarifying some issues about Fringe Benefit Tax.
The CBDT says that FBT will have to be paid by the employers in advance during the financial year on a quarterly basis.
Employees Stock Options (ESOPs) have been exempt from the new FBT, but not car and health perks, leave travel concessions and several other benefits, including amusement, games and sports.
Here is the text of the circular:
The Finance Act, 2005 has introduced a new levy, namely, Fringe Benefit Tax (hereafter referred to as FBT) on the value of certain fringe benefits. The provisions relating to levy of this tax are contained in Chapter XII-H (sections 115W to 115WL) of the Income-tax Act, 1961.
This circular seeks to provide a harmonious, purposive and contextual interpretation of the provisions of the Finance Act, 2005 relating to the FBT so as to further the objective of this levy.
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 affecting 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 the benefit is collectively enjoyed; (b) Of 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; and (c) Of the difficulty in the valuation of the benefits. In India, prior to assessment year 1998-99, some perquisites/fringe benefits were included in salary in terms of section 17 and accordingly taxed under section 15 of the Income-tax Act in the hands of the employee and a large number of fringe benefits were taxed by the employer-based disallowance method where the quantum of the disallowance was estimated on a presumptive basis.
In practice, taxation of fringe benefits by the employer-based disallowance method resulted in large-scale litigation on account of ambiguity in defining the tax base. Therefore, the taxation of fringe benefits by the employer-based disallowance method was withdrawn by the Finance Act 1997.
However, the withdrawal of the provisions relating to taxation of fringe benefits by the employer-based disallowance method resulted in significant erosion of the tax base. The Finance Act, 2005 has introduced a new levy, namely, the FBT as a surrogate tax on employer, with the objective of resolving the problems enumerated in para 2.1 above, expanding the tax base and maintaining equity between employers.
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 a presumptive method applied to certain heads of expenditure as a measure/indicator of fringe benefits.
The scope of the term fringe benefits provided' is defined in sub-section (1) of section 115WB to mean any consideration for employment provided by way of
(a) 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); (b) Any free or concessional ticket provided by the employer for private journeys of his employees or their family members; and (c) Any contribution by the employer to an approved superannuation fund for employees. As pointed out in para 2.1, many perquisites are disguised as reimbursements or other miscellaneous expenses so as to enable employees to escape/reduce tax on their real income.
There are two alternate methods to identify such disguised payments to employees: the presumptive method and the discretionary method. Under the presumptive method, the FBT 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 sub -section (2) of section 115WB 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 guesthouse 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; and (P) Scholarships.
(i) A company; (ii) A firm; (iii) An association of persons or a body of individuals, excluding any fund, trust or institution eligible for exemption under clause(23C) of section 10 or registered under section 12AA; (iv) A local authority; or (v) An artificial juridical person. The tax on fringe benefits is payable by the employer even if he is not liable to pay income tax on his total income computed in accordance with the provisions of the Income tax Act other than the provisions of Chapter-XIIH.
Tax Rate
FBT shall be payable at the rate of 30% of the value of fringe benefits computed in the manner provided in section 115WC.
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