FRINGE BENEFIT TAX – THE LAW

Arvind (Article) (150 Points)

10 March 2009

INCOME TAX ON FRINGE BENEFITS [SECTIONS 115W to 115WL, APPLICABLE FROM ASSESSMENT YEAR 2006-07 ONWARDS]

INTRODUCTION:

Employees enjoy many fringe benefits at the cost of the employers. In some cases, the entire expenditure incurred by the employer is taxable in the hands of the employees. In some other cases, these perquisites are taxable in the hands of the employees at concessional mode of valuation provided by the erstwhile rule 3. Some of them are exempt and not chargeable to tax because of specific provision under the said rule 3 or because of executive instructions. The Finance Minister made the following remarks in respect of these perquisites in his budget speech –

“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. Neither the employer nor the employee pays any tax on this 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; 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 (FBT).”…(FROM BARE ACTS)

COMPARISON: – (A comparison between the existing & new provisions)

The cumulative impact of the amendments to section 17 & Rule 3(7) are given below –

S.NO.	TYPE OF PERQUISITE / FRINGE BENEFIT	AMENDED STATUS
A.	Perquisite :
1.	Accommodation	Changed to 20% of Salary
	Car	Deleted
	Sweeper/Gardner/Watchman/Personal Attendant	Unchanged
	Gas/Electricity/Water/ Energy	Unchanged
	Free/concessional educational facilities	Unchanged
	Free/concessional journey	Deleted
	Residual perquisite valuation clause	Deleted
B.	Fringe Benefit :
	Interest free or concessional loans	Unchanged
	Holiday, tour, travel, accommodation etc.	Deleted
	Free meals during office hours	Deleted
	Gifts	Deleted
	Credit Card fees	Deleted
	Expenditure on clubs	Deleted
	Movable asset for personal use	Unchanged
	Transfer of any movable asset to employee	Unchanged

An example – In light of above the perquisite value of the house provided by the employer is increased from the existing 10% & 7.5% to 20% & 15%. Thus effectively the scope of taxable perquisites in the hands of the employees is substantially reduced

SOME DEFINITIONS:

Employer – For the purpose of FBT the term “employer” means –

a. a company;

b. a firm;

c. an association of persons or a body of individuals, whether incorporated or not [but it does not include any fund or trust or institution which is eligible for exemption under section 10(23C) or registered under section 12AA];

d. a local authority; and

e. every artificial juridical person, not falling within any of the above.

Employee – The term employee has not been defined for FBT purpose.Generally persons deriving salary or having their names on the payroll can be termed as employees. Hence Directors, advisors who are professionally retained but are not employees and partners of a firm, can be excluded. Further employee includes former employee (except for expenditure on free journey tickets and deemed fringe benefits).

Fringe Benefit – sec.115 WA defines value of fringe benefits to mean –

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 the employees and their family members;

c. Any contributions by the employer to an approved superannuation fund;

A detailed itemised schedule of the types of Fringe Benefits, its valuation, its taxability and the actual tax impact is provided in the Annexure A appended hereto.

RATE OF TAX

If the following conditions are satisfied, the employer would be liable for fringe benefit tax with effect from the assessment year 2006-2007. The tax will be calculated at the rate of Tax Rate + Surcharge (SC) + Education Cess (EC)+Higher & secondary education cess i.e. 33.99% (30% + 10% + 2% + 1%) on the “value” of fringe benefits (the SC will be 2.50% in case non-domestic company). This is an addition to regular income tax. Fringe benefit tax is not applicable if a person does not have any employee during the previous year. The conditions are –

1 Fringe benefits are provided (or deemed to be provided) by an “employer’.

2 These benefits are provided to his/ its employees.

3 These benefits are provided during the previous year.

SIGNIFICANT IMPLICATIONS

a. The provisions in respect of FBT Law are more or less similar to the regular provisions and provides for a independent and separate machinery for calculation, advance payment, quarterly and annual return/statement filing, assessment, penalties/interest and prosecution for FBT.

b. FBT is payable irrespective of whether the employer is liable to pay tax on his income or not. Further, FBT is payable irrespective of whether the employer (except individual, HUF, Specified Funds, Trusts/AOP’s/BOI’s existing not for the purposes of profit and claiming exemption under section 10(23C) and those registered under section 12AA) is engaged in business or profession. Thus the following entities would also be liable to pay FBT if their employees are enjoying fringe benefits –

S.NO.	TYPE OF ENTITY	S.NO.	TYPE OF ENTITY
1.	Loss making entities	6.	Private Trusts, AOP’s, BOI’s
2.		7.	Cooperative Societies
3.	Entities whose income is fully exempt under section 10	8.	Liason office or PE of a Foreign Company
4.	Entities whose taxable income is Nil on account of tax holidays	9.	Non-profit companies under section 25 of the Companies Act, 1956
5.	100% EOU’s	10.	Political Parties

c. No minimum threshold has been prescribed for FBT. Accordingly, FBT related compliance would be attracted irrespective of amount (however small) of the value of Fringe Benefit enjoyed or the amount of FBT payable.

d. The employer would now be required to maintain extensive and detailed records in respect of expenses incurred on the fringe benefits.

e. An employer not having a PAN but required to pay FBT is also required to obtain PAN.

f. Fringe Benefit tax is not deductible by virtue of Section 40(a)(ic) while calculating income from Business or Profession.

g. The following cannot be “employers” for the purpose of fringe benefit tax (in other words, fringe benefits tax is not applicable in the case of following employers) –

4 an individual ( whether or not books of accounts are audited );

5 a Hindu undivided family ( whether or not books of accounts are audited );

6 an AOP/BOI whose income is eligible for exemption under section 10(23C) or which is registered under section 12AA;

7 Central Government;

8 State Government.

h. Other provisions of the Income Tax Act shall, as far as may be, apply in relation in fringe benefits also.

i. FBT on employee’s Family Members – in the absence of specific inclusion of a particular benefit accruing to the family members, one may include it for FBT only if the expenditure is directly or indirectly resulting in a benefit to the family member and thereby to the employee.

FBT RETURNS, ESTIMATES, ADVANCE TAX

a. Employer is required to furnish Annual Return of Fringe Benefits (section 115 WD). The due date for filing this return is 31st October in respect of companies and those tax payers whose accounts are required to be audited u/s 44AB of the Act and in case of any other assessee, 31st July.

b. Belated & Revised Returns can be filed within one year from end of the relevant assessment year or before the completion of assessment whichever is earlier.

c. The employer is required to estimate his annual FBT liability and discharge the same by way of quarterly installments of advance tax. The due dates are – 15th July, 15th October, 15th January and 15th March.

ASSESSMENTS

Provisions for Summary Assessments, Regular Assessments, and Notice & Reassessments are specified under the law and the relevant sections depicting these provisions are 115 WE, WF, WG & WH of the Act. Provisions for reassessments and best judgment assessments are specified for the cases escaping assessment.

INTEREST, PENALTY, PROSECUTION

a. Interest @ 1% of the FBT amount or shortfall (of FBT or advance FBT), for every month or part of month for which the non-payment or shortfall continues.

b. Interest @ 1% of the amount of FBT for every month or part of month during which the non-filing of FBT Returns continues.

c. Penalty provisions dealing with concealment have been extended to FBT. Further, certain other penal and prosecution provisions are also made applicable for FBT.

d. Prosecution & Appeals – provisions in cases of disputes are also separately envisaged under the FBT Law.

FBT AUDIT

As per the announcement by the Finance Minister in the Lok Sabha every person liable for FBT shall be required to file a certificate from a Chartered Accountant certifying the Value of Fringe Benefits.

FBT ACCOUNTING

a. The FBT should be recognised in the period in which the concerned expenditure is recorded. If the concerned expenditure which attracts FBT is charged to revenue, the related FBT also will be charged to revenue and form part of Remuneration and Benefits to Employees. If the concerned expenditure which attracts FBT is capitalized, the related FBT will also be capitalized.

b. Provision for Fringe Benefit tax should be reflected distinctly as per the provision of FBT. Accounting Standard 22(Accounting for Taxes on Income) is not applicable to FBT.

GLOSSARY

1. FBT – Fringe Benefit Tax.

2. All reference to section means sections of the Income Tax Act, 1961 and rules means Income Tax Rules.

3. AOP/BOI/HUF – Association of Persons / Body of Individuals / Hindu Undivided Family

ANNEXURE A

STATEMENT SHOWING THE ELIGIBLE PAYMENT OR EXPENDITURE, VALUE OF FRINGE BENEFIT THEREON AND THE EFFECTIVE TAX PAYABLE –

Sr. No.		Expenditure / Payments =(A)		Value of Fringe Benefit =(B)	Effective Tax Rate [% of (B)]
“DIRECT FRINGE BENEFITS” – means any consideration for employment provided by way of the following :
1		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). (not to include perquisites which are taxable in the hands of the employees)		100% – Actual Cost	33.99%
2.		Any free or concessional ticket provided by the employer for the private journey of the employees or their family members		100% – Actual Cost (The actual cost of such journey as reduced by the amount if any recovered from the employee)	33.99%
3.		Employer contribution to an approved superannuation fund		100%– Actual Contribution	33.99%
“DEEMED FRINGE BENEFITS” – the following shall be deemed fringe benefits to have been provided by the employer to his/its employees :
1.		Rent free house		Taxable in employee’s hands	Nil
2.		Entertainment		20% of expenses	6.73%
				20% of the expenses (any other employer)	6.73%
				5% of expenses (hotel business)	1.68%
4.		Conference (not to include fees paid by employees for participation in any conference)		20% of expenses	6.73%
5.		Sales promotion including publicity except mentioned in Note 2 below		20% of expenses.	6.73%
	6.		Use of Club facilities including health, sports club etc.	50% of expenses	16.83%
7.		Employee welfare		20% of expenses	6.73%
8.		Provision for Transport Facilities by an undertaking engaged in the business of crriage of goods & passengers		100% (at the cost at which it is provided)	33.99%
	9.		Festival celebrations	50% of expenses	16.83%

Sr. No.		Expenditure / Payments =(A)		Value of Fringe Benefit =(B)	Effective Tax Rate [% of (B)]
				20% of expenses.	6.73%
				5% of expenses (business of construction, manufacture or production of pharmaceuticals & computer software)	1.68%
				20% of expenses.	6.73%
				5% of expenses (business of construction, manufacture/production of pharmaceuticals & computer software)	1.68%
				20% of expenses	6.73%
				5% of expenses (business of manufacture or production of pharmaceuticals and computer software)	1.68%
				20% of expenses	6.73%
				5% of expenses (business of carriage of passengers or goods by motor car)	1.68%
				0% of expenses (business of carriage of passengers or goods by aircraft)	Nil
				20% of expenses (other employer)	6.73%
	15.		Use of telephone (including mobile & excluding leased telephone lines)	20% of expenses	6.73%
	16.		Maintenance of any accommodation in nature of guest house (other than used for training purposes)	20% of expenses	6.73%
	17.		Gifts	50% of expenses	16.83%
	18.		Use of Credit Card	100%	33.99%
	19.		Scholarships (employee’s children)	50% of expenses	16.83%
	Notes: 1. The income tax rate considered above is 33.99% i.e. 30% + 10% SC + 2% education cess. 2. Sales promotion & advertising expenditure will not include – ·1 Expenses (including rental) on advertisement of any form in print (including journals, catalogues or price lists) or electronic media or transport system; ·2 Expenses on holding of, or participation in any press conference or business convention, fair or exhibition; ·3 Expenses on sponsorship of any sports event, or any other event organized by any government agency or trade association or body; ·4 Expenses on publication in print or electronic media of any notice required by law; ·5 Expenses on advertisement by way of signs, art work, painting, banners, direct mail, electric spectaculars, kiosks, hoardings, bill boards etc. ·6 Any payment to the advertising agency for any of the above purposes. 3. Employee welfare expenses to exclude any expenses incurred to fulfill any statutory obligation or mitigate occupational hazards or provide first aid facilities in hospital or dispensary run by employer.

IMPORTANT – DUE DATES

I. ADVANCE PAYMENT OF FBT

QUARTER ENDED	DUE DATE
April to June	15^th July
July to September	15^th October
October to December	15^th January
January to March	15^th March

NOTE – The amount of advance tax payable in the Financial year shall be 30% of the value of Fringe Benefits paid or payable in each quarter. A quarterly estimate is also required to be filed along with the payment of advance FBT on the above dates.

II. FILING OF RETURN

CATEGORY OF EMPLOYER	DUE DATE
A Company	31st September
Other than company and books of account are required to be audited	31st September
Other than company and books of account are not required to be audited	31st July