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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

Clause No. of Sec. 115WB (1)

Expenditure Covered

Value U/s 115WC as % of the expenditure mentioned in column (2)

(1)

(2)

(3)

1(a)

Any privilege, service, facility or amenity, directly or indirectly, provided by an employer to his employees (including former employer or employees) by reason of their employment; or

100%

1(a)

Any reimbursement, directly or indirectly, made by the employer to his employees for any purpose.

100%

1(b)

Any free or concessional ticket provided by the employer for private journeys of the employees and their family members; and

100%

1(c)

Any contribution by the employer to an approved superannuation fund

100%

ITEMS OF EXPENDITURES WHICH WILL BE TREATED AS DEEMED FRINGE BENEFIT

Clause No. of Sec. 115WB (2)

Expenditure Covered

Exclusions

Value U/s 115WC as % of the expenditure mentioned in column (2)

(1)

(2)

(3)

(4)

(A)

Entertainment

 

20%

(B)

Hospitality

  1. Expenditure on food or beverages to staff in office or factory. Therefore, any food and beverages provided to persons other than employees shall not be excluded from this clause and will be covered as fringe benefit.
  2. Payments of any expenditure through non-transferable paid vouchers which can be used only at eating joints or outlets.

In this clause, there is no distinction whether the prepaid vouchers are used by the employee or others. They are excluded.

20%

(5% for hotels)

(C)

Conference

Fees for participation by the employees in any conference is excluded.

20%

(D)

Sales promotion and publicity

The following types of expenditure which are on advertisements and publicity shall be excluded-

  • Advertisement expenditure in print, electronic or transport media and it includes any rent paid for hoarding, tents, etc.
  • Press conference and business convention, fair and exhibition expenses.
  • Sponsorship of any event organized by the Government agency, trade association or body.
  • Any statutory or legal compliance notices published in print or electronic media.
  • Advertisement by the medium of sign boards, artworks, paintings, banners, awnings, mails, spectaculars, kiosk, hoardings and bill boards, etc.
  • Any payments to advertising agency for the above purposes.

It is not clear whether the expenditure incurred under this head of FBT shall not be considered as FBT in any other head, say, traveling and hotel expenses incurred for organizing a trade fair press conference or business convention of employees shall be excluded from the other heads or not as the expenditure on holding of business convention is excluded.

20%

(E)

Employees Welfare

Expenditure incurred for following purposes are excluded:-

  • To fulfill any statutory obligation
  • To mitigate occupational hazards
  • First aid facility in any hospital or dispensary maintained by employer

The employer maintaining full-fledged hospital will have to allocate and bifurcate the cost, which can be considered as towards first aid facility and other facilities.

20%

(F)

Conveyance, Tour and Travel (including foreign travel)

Foreign tour expenses, local tour expenses incurred for holding business convention or fairs, etc, will not be considered for FBT.

However, such expenses incurred for conferences will be included in conference expenses and will have to be excluded from here.

20% *

(5% for Construction business, manufacturers

/ Producers of pharmaceutical s, software manufacturers / producers)

(G)

Use of Hotel, boarding and lodging facilities

It is doubtful that even hotels used for training purposes and boarding and lodging expenses incurred there shall be covered under this clause, though maintenance of accommodation for training purposes is to be excluded in Clause - K.

20%

(5% for Construction business, manufacturers / producers of pharmaceuticals, software manufacturers / producers)

(H)

Repair, running (incl. fuel), maintenance of motor cars and the amount of depreciation thereon.

With effect 1-4-2005 new depreciation rates have been made effective. According to the depreciation rates, motor cars are eligible for depreciation @ 15 per cent.

20%

(5% for Business of carriage of goods /

Passengers by motor car

(I)

Repair, running (incl. fuel), maintenance of aircrafts and the amount of depreciation thereon.

 

20%

(Airlines- Nil)

(J)

Use of telephone (incl. mobile phone)

Mobile telephone expenses incurred by the employer will also be covered along with landlines.

20%

(K)

Maintenance of any accommodation in the nature of Guest house.

Depreciation on guest houses has been excluded and only maintenance expenses are covered.

20%

(L)

Festival celebrations

In country like India every day is filled up with festivities, but FM wants to tax happiness.

50%

(M)

Use of health club and similar facilities

The dichotomy of income tax is that deduction is granted for medical insurance premium and tax is levied on use of health clubs.

50%

(N)

Gifts

In fact, there is a provision of taxing gifts in excess of Rs. 50,000 from non-specified relatives. If a company gives a gift of Rs. 51,000 to its employee for bravery, it would be taxed in the hands of employee as well as it will be considered to the extent of 50 per cent for FBT.

50%

(O)

Scholarship

In the Finance Bill scholarship expenses were restricted to the extent given to children of employees. Now it will cover everybody. There are so many companies, which are running scholarship for students for higher studies who are neither the employees nor their children.

50%

DEFINITION OF EMPLOYER

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

  • Employer means,-
  • a company;
  • a firm;
  • an association of persons or a body of individuals, whether incorporated or not, but excluding any fund or trust or institution eligible for exemption under clause (23C) of section 10 or registered under section 12AA ;
  • a local authority ; and
  • every artificial juridical person, not falling within any of the preceding sub-clauses;-

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

Category of Employer

Tax Rate of FBT

Surcharge

Education Cess

Effective Rate of FBT

Firms/domestic companies/AJPs

30%

10%

2%

33.66%

Non Domestic Companies

30%

2.5%

2%

31.365%

Local authority

30%

2%

30.6%

AOP/BOI whose total income dose not exceed Rs. 10,00,000

30%

2%

30.6%

AOP/BOI whose total income exceeds Rs. 10,00,000

30%

10%

2%

33.66%

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

Quarter in the financial year

Amount payable as advance tax for that quarter

Due date of payment

1 st Apr to 30 th Jun

30% of the value of FBs paid or payable in that quarter

15 th July

(extended upto 31.8.2005)

1 st Jul to 30 th Sep

---- DO ----

15 th October

1 st Oct to 31 st Dec

---- DO ----

15 th of January

1 st Jan to 31 st Mar

--- DO ----

15 th March

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

  • Fringe benefit tax is not allowable for deduction (Section 40 (a)(ic))
  • Loss making companies will have this extra burden.
  • Even Companies whose income is exempt U/s 10A / 10B also have to fork out this new tax.
  • Even assesses who are opting to pay tax on presumptive basis U/s 44AD, 44AE & 44AF have also not been exempted although they are not required to maintain books of accounts, which is contradicting.
  • For the purpose of FBT employees include current, former or future employee
  • Even capital expenditure e.g. Television, refrigerator, geyser, Water dispenser units used for recreation for employees will also be considered for valuation of FBs.
  • No FBT is payable if there are no employees
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