Fringe Benefit Tax

PROJECT BY:

NAME: Mukul Rathore

COURSE: B.A.LL. B (Hons.)

ROLL NO: 1742

SEMESTER: 7th

SUBMITTED TO:

Dr. Ganesh Prasad Pandey

Assistant Professor of law

A FINAL DRAFT SUBMITTED FOR THE PARTIAL FULFILMENT OF THE COURSE
TAXATION LAW-I FOR THE DEGREE OF B.A.LL. B

October, 2020

CHANAKYA NATIONAL LAW UNIVERSITY, NYAYA NAGAR,

MITHAPUR, PATNA – 800001
 CERTIFICATE OF DECLARATION

I hereby declare that the research paper titled Fringe Benefit Tax submitted by me is based on
actual and original work carried out by me. Any reference to work done by any other person or
institution or any material obtained from other sources have been duly cited and referenced.
Mukul Rathore
1742
 ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my guide Dr. ganesh
prasad pandey for her exemplary guidance, monitoring and constant encouragement throughout
the course of this project. The blessing, help and guidance given by his from time to time shall
carry me a long way in the journey of life on which I am about to embark.
I also take this opportunity to express a deep sense of gratitude to my seniors, the library staff
and my friends for their valuable information and guidance, which helped me in completing this
task through various stages.
I would also thank my Institution and my faculty members without whom this project would
have been a distant reality. I also extend my heartfelt thanks to my family and well-wishers.
Contents
Introduction......................................................................................................................................5
Applicability....................................................................................................................................6
Fringe Benefits [Section 115wb (1) And (2)]..................................................................................7
Value of fringe benefits (Section 115WC).......................................................................................9
Constitutional Validity...................................................................................................................11
Rationale for Levy.........................................................................................................................12
CONCLUSION..............................................................................................................................13
BIBLIOGRAPHY..........................................................................................................................14
Introduction
The Finance bill, 2005 has introduced Chapter XII-H providing for the levy of Income-tax on
fringe benefits offered by employers to their employees. The Finance Minister Mr. P.
Chidambaram while presenting the budget in the year 2005 had made the statement that ‘I have
looked in to the present system of taxing the 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 these benefits, which are certainly of considerable material value. 1 At present where the
benefits are fully attributable to the employee they are taxed in the hands of the employee: the
position will continue. He also justifies that this tax has to continue to provide equity in taxation
in this year while moving the Finance Bill 2006. The Fringe Benefit Tax is a tax on expenditure
incurred by employers on their employees and thus strictly speaking does not constitute a tax on
income. It is for consideration whether the cost of the fringe benefits which constitutes the tax
base should be deemed to be income under the Income-tax Act. A similar provision is contained
in section 115JB.The concept of presumptive taxation has become the order of the day. The
fringe benefit tax was tackled to a certain amount in the hands of the employees by way of
valuation of perquisites using certain elements of presumption. The Finance Act 2005 covers the
concept of taxation of fringe benefits in the nature of personal elements in the hands of the
employer. The Amendments carried out by the Finance Act 2006 gave certain relief to a group of
employers.

What are fringe benefits? Companies give some fringe benefits to all their employees and some
only to those at the executive level for costs related to their work. Some others may also be
extended for increasing general job satisfaction. Some of the common fringe benefits are
telephone reimbursements, employer’s contribution to the superannuation fund, and access to
creche services. These could also include perks like tuition assistance, health insurance, childcare
reimbursements, subsidised cafeteria, free bus service for commute, employee discounts and
employee stock options.2

1
Nimitha salim, Fringe Benefit Tax, http://www.legalserviceindia.com/article/l303-Fringe-Benefit-Tax.html
2
What is Fringe Benefit tax, Businesss Standard? https://www.business-standard.com/about/what-is-fringe-benefit-
tax.
Fringe Benefit Tax [Section 115w (B)]

“Fringe Benefit Tax” or “Tax” means the tax chargeable under section 115WA. Fringe Benefit
Tax helps in eliminating discretion. Under FBT, scope for evasion is very limited. FBT will
increase effective rate of corporate tax by 1 to 1.5%. FBT is one method of requiring corporates
to pay a little more tax.3

The Indian model of Fringe

Benefit Tax is similar to that of
Australia and New Zealand. In
the
Indian model of Fringe
Benefit Tax, the benefits have
been broadly classified into
two
categories, viz
The Indian model of Fringe
Benefit Tax is similar to that of

3
Ibid.
Australia and New Zealand. In
the
Indian model of Fringe
Benefit Tax, the benefits have
been broadly classified into
two
categories, viz;
The Indian model of Fringe
Benefit Tax is similar to that of
Australia and New Zealand. In
the
Indian model of Fringe
Benefit Tax, the benefits have
been broadly classified into
two
categories, viz;
The Indian model of Fringe
Benefit Tax is similar to that of
Australia and New Zealand. In
the
Indian model of Fringe
Benefit Tax, the benefits have
been broadly classified into
two
categories, viz;
The Indian model of fringe benefit tax is similar to that of Australia and New Zealand. In the
Indian model of fringe benefit tax, the benefits have been broadly classified into two categories:
viz4
1. Fringe Benefits identifiable with employees
2. deemed fringe benefits.

Applicability

The Fringe Benefit tax is a tax to be paid by an employer in addition to the income tax payable
for every assessment year starting from the assessment year 2006-07. the tax is to be paid in
respect of the fringe benefits provided or deemed to have been provided by an employer to his
employees. The liability to pay Fringe Benefit Tax shall be there even when there is no liability
to pay income tax by an employer. Accordingly, all those who fall within the definition of
4
Thimmaiah B C Thimmaiah, FRINGE BENEFIT TAX -ISSUES AND NUANCES, (March 2020).
https://www.researchgate.net/publication/339712547_FRINGE_BENEFIT_TAX_-ISSUES_AND_NUANCES.
employer shall be required to pay tax on the fringe benefits provided to the employees
irrespective of the fact that income, which an employer is earning, is exempt under the Income
Tax Act or there is a loss. Accordingly, those entities which are claiming exemption under
Section 10 such as mutual funds, undertakings in free trade zone claiming exemption under
Section 10A, export-oriented units claiming exemption under Section 10B or Section 10BA,
shall be liable to pay Fringe Benefit Tax. The Fringe Benefit Tax is a liability of the tax of the
employees to be borne by the employer. That is why even loss-making entities and entities whose
income is exempt shall also be required to pay Fringe Benefit

Fringe Benefits [Section 115wb (1) And (2)]

As per section 115 WB

[1] – Means Benefits, any consideration provided for employment5
1. Any privilege, service, facility or amenity directly or indirectly provided by an employer
whether by way of reimbursement or to his employees [including former employee or
employees] and

2. Any free or concessional ticket provided by the employer for Private journey of his employees
or their family members and

3. Any Contribution by the employer to an approved Super annulation fund for employees. The
above definition of fringe benefits consists of three clauses. Clauses (b) and (c) are specific cases
of fringe benefits.

Further, as per Section 115WB (2), the fringe benefits shall be deemed to have been provided if
the employer has incurred any expense or made any payment for the purposes of (a)
entertainment; (b) festival celebrations; (c) gifts; (d) use of club facilities; (e) provision of
hospitality of every kind to any person whether by way of food and beverage or in any other
manner, excluding food or beverages provided to the employees in the office or factory;(f)
maintenance of guest house; (g) conference; (h) employee welfare; (i) use of health club, sports
and similar facilities, (j) sales promotion including publicity; (k) conveyance tour and travel
5
The Income-tax Act, 1961, No. 48, Act of parliament, (India).
including foreign travel expenses; (l) hotel boarding and lodging; (m) repair, running and
maintenance of motor cars; (n) repair, running and maintenance of aircrafts; (o) consumption of
fuel other than industrial fuel; (p) scholarship to the children of the employees.6

The taxation of perquisites of fringe benefits provided by an employer to his employees in

addition to his cash salary or wages paid is subject to varying treatment in different countries.
These benefits are either taxed at the hands of the employees themselves or the value of such
benefits is subject to a ‘fringe benefit tax’ at the hands of the employer. The rationale for levying
a fringe benefits tax on the employer lies in the inherent difficulty in isolating the ‘personal
element’ where there is collective enjoyment of such benefits and attributing the same directly to
the employee. So, this is especially where the expenditure incurred by the employer is ostensibly
for purposes of the business but includes, in partial measure, a benefit of a personal nature.
Moreover, in cases where the employer directly reimburses the employee for expenses incurred,
it becomes difficult to effectively capture the true extent of the perquisite provided because of the
problem of cash flow in the hands of the employer.

Therefore, it is proposed to adopt a two-pronged approach for the taxation of the fringe benefits
under the Income-tax Act. Perquisites, which can be directly attributed to the employees, will
continue to be taxed at their hands in accordance with the existing provisions of Section 17(2) of
the Income-tax Act and subject to the method of valuation outlined in rule 3 of the Income-tax
Rules. In cases, where attribution of the personal benefits poses problems, or for some reasons, it
is not feasible to tax the benefits in the hands of the employee, it is proposed to levy a separate
tax known as the fringe benefit tax on the employer on the value of such benefits provided or
deemed to have been provided to the employees.7

6
Ibid.
7
Nimitha salim, Fringe Benefit Tax, http://www.legalserviceindia.com/article/l303-Fringe-Benefit-Tax.html
Value of fringe benefits (Section 115WC).

 (1) For the purposes of this Chapter, the value of fringe benefits shall be the aggregate of the
following, namely8: —
(a) cost at which the benefits referred to in clause (b) of sub-section (1) of section 115WB, is
provided by the employer to the general public as reduced by the amount, if any, paid by,
or recovered from, his employee or employees:
Provided that in a case where the expenses of the nature referred to in clause (b) of sub-
section (1) of section 115WB are included in any other clause of sub-section (2) of the said
section, the total expenses included under such other clause shall be reduced by the amount
of expenditure referred to in the said clause (b) for computing the value of fringe benefits;
(b)  the amount of contribution, referred to in clause (c) of sub-section (1) of section 115WB,
which exceeds one lakh rupees in respect of each employee;
(ba) the fair market value of the specified security or sweat equity shares referred to in clause
(d) of sub-section (1) of section 115WB, on the date on which the option vests with the
employee as reduced by the amount actually paid by, or recovered from, the employee in
respect of such security or shares.
Explanation. —For the purposes of this clause, —
 (i)  "fair market value" means the value determined in accordance with the method as
may be prescribed by the Board;
 (ii)  "option" means a right but not an obligation granted to an employee to apply for the
specified security or sweat equity shares at a predetermined price;
(c)  twenty per cent of the expenses referred to in clauses (A) to (L) of sub-section (2)
of section 115WB;
(d)  fifty per cent of the expenses referred to in clauses (M) to (P) of sub-section (2) of section
115WB;
(e)  five per cent of the expenses referred to in clause (Q) of sub-section (2) of section 115WB.
(2) Notwithstanding anything contained in sub-section (1), —
(a)  in the case of an employer engaged in the business of hotel, the value of fringe benefits for
the purposes referred to in clause (B) of sub-section (2) of section 115WB shall be "five
per cent" instead of "twenty per cent" referred to in clause (c) of sub-section (1);
8
The Income-tax Act, 1961, No. 48, Act of parliament, (India).
(aa) in the case of an employer engaged in the business of carriage of passengers or goods by
aircraft, the value of fringe benefits for the purposes referred to in clause (B) of sub-section
(2) of section 115WB shall be "five per cent" instead of "twenty per cent" referred to in
clause (c) of sub-section (1);
(ab) in the case of an employer engaged in the business of carriage of passengers or goods by
ship, the value of fringe benefits for the purposes referred to in clause (B) of sub-section
(2) of section 115WB shall be "five per cent" instead of "twenty per cent" referred to in
clause (c) of sub-section (1);
(b) in the case of an employer engaged in the business of construction, the value of fringe
benefits for the purposes referred to in clause (F) of sub-section (2) of section 115WB shall
be "five per cent" instead of "twenty per cent" referred to in clause (c) of sub-section (1);
(c)  in the case of an employer engaged in the business of manufacture or production of
pharmaceuticals, the value of fringe benefits for the purposes referred to in clauses (F) and
(G) of sub-section (2) of section 115WB shall be "five per cent" instead of "twenty per
cent" referred to in clause (c) of sub-section (1);
(d)  in the case of an employer engaged in the business of manufacture or production of
computer software, the value of fringe benefits for the purposes referred to in clauses (F)
and (G) of sub-section (2) of section 115WB shall be "five per cent" instead of "twenty per
cent" referred to in clause (c) of sub-section (1);
(da) in the case of an employer engaged in the business of carriage of passengers or goods by
aircraft, the value of fringe benefits for the purposes referred to in clause (G) of sub-section
(2) of section 115WB shall be "five per cent" instead of "twenty per cent" referred to in
clause (c) of sub-section (1);
(db) in the case of an employer engaged in the business of carriage of passengers or goods by
ship, the value of fringe benefits for the purposes referred to in clause (G) of sub-section
(2) of section 115WB shall be "five per cent" instead of "twenty per cent" referred to in
clause (c) of sub-section (1);
(e)  in the case of an employer engaged in the business of carriage of passengers or goods by
motor car, the value of fringe benefits for the purposes referred to in clause (H) of sub-
section (2) of section 115WB shall be "five per cent" instead of "twenty per cent" referred
to in clause (c) of sub-section (1);
(f)  in the case of an employer engaged in the business of carriage of passengers or goods by
aircraft, the value of fringe benefits for the purposes referred to in clause (I) of sub-section
(2) of section 115WB shall be taken as Nil.
Constitutional Validity

Entry 82 of List I of the 7th schedule to the Constitution empowers the Parliament to frame laws
to levy taxes on income and not on expenditure. After the decision of A. Sanyasi Rao’s case1 in
and Union of India v. Sanyasi Rao2, by the Supreme Court the argument about the validity of
this provision may not hold good. The entire system of FBT based on the valuation of specified
expenditures incurred by the taxpayers irrespective of the allowability to be considered under the
regular assessment. This fringe benefit tax is a tax on the expenditure incurred instead of income
earned.9

The sections 44AD, 44AF and 44AE are in the statute book with the intention to tax the income
on presumptive basis where the tax payers are not maintaining the books of account. The
taxpayers can declare lower income provided that they maintain the books of accounts and get
their account audited u/s 44AB. The taxpayers are given options to choose their presumptive
taxation or maintain the books of accounts, as per the law for regular computation. Thus, this
concept of presumptive taxation is different from the present mode of taxation of fringe benefits.

The Chapter XII H provides presumptive taxation on the fringe benefits enjoyed by the
employees and deemed fringe benefits enjoyed by everybody. This chapter is a separate
enactment within the income tax Act, which provides for total compartmental system of tax
computation, assessments, recoveries, appeals, interest payments etc. the chapter XII-H with
section 115W to section 115WL would cover the total tax system of FBT. Now the question can
be raised as to whether the basic concept of FBT is applicable for the expenses incurred for and
on behalf of employees alone of for others also. The finance minister has assured that the
genuine business expenditure will not be hit by the FBT. But unfortunately, no such remedy is
9
Nimitha salim, Fringe Benefit Tax, http://www.legalserviceindia.com/article/l303-Fringe-Benefit-Tax.html.
available in the Act.

Rationale for Levy

The need for introducing fringe benefits tax on the employer arose on account of the inherent
difficulty in identifying the personal element’ where there is collective enjoyment of certain
perquisites, amenities & benefits and attributing the same directly to the employee. This is so
specially where the expenditure incurred by the employer is ostensibly for purposes of the
business but inherently includes, at least partially, the benefit of a personal nature. Moreover, in
cases where the employer directly reimburses the employee for expenses incurred, it becomes
difficult to effectively capture the true extent of the perquisite provided because of the problem
of cash flow in the hands of the employer.

Under the proposed provisions, fringe benefit tax is payable by an employer who is either an
individual or a Hindu undivided family engaged in a business or profession; a company; a firm;
an association of persons or a body of individuals; a local authority; or an artificial juridical
person. The fringe benefit tax is payable by the employer even where he is not liable to pay
Income-tax on his total income computed in accordance with the provisions of this Act.
Implications – Difficulties. The apparent contradiction in legislative intent and proposed
provision would lead to litigation.
CONCLUSION
Fringe Benefit Tax (FBT) is fundamentally a tax that an employer has to pay in lieu of the
benefits that are given to his/her employees. It was an attempt to comprehensively levy tax on
those benefits, which evaded the taxman. The list of benefits encompassed a wide range of
privileges, services, facilities or amenities which were directly or indirectly given by an
employer to current or former employees, be it something simple like telephone reimbursements,
free or concessional tickets or even. FBT was introduced as a part of the Finance Bill of 2005
and was set at 30% of the cost of the benefits given by the company, apart from the surcharge
and education cess that also needed to be paid. This tax needed to be paid by the employer in
addition to the income tax, irrespective of whether the company had an income-tax liability or
not.

Fringe benefit tax (FBT) was a form of tax that companies paid in lieu of benefits they offered
their employees in addition to the compensation paid to them. It was included by the Finance Act
2005 with effect from April 1, 2006. It was set at 30 per cent of the cost of benefits the company
paid and it was aimed to bring under the tax net those benefits that were previously out of it. This
tax was paid in addition to income tax, irrespective of whether or not the company had income-
tax liability. Companies give some fringe benefits to all their employees and some only to those
at the executive level for costs related to their work. Some others may also be extended for
increasing general job satisfaction. Some of the common fringe benefits are telephone
reimbursements, employer’s contribution to the superannuation fund, and access to creche
services. These could also include perks like tuition assistance, health insurance, childcare
reimbursements, subsidized cafeteria, free bus service for commute, employee discounts and
employee stock options.
 
Companies use fringe benefits to motivate, recruit and retain high-quality employees at the
organization. Companies that compete for best talent in their field often offer extraordinary
benefits. Various provisions related to income tax on fringe benefits were modified by the
Finance Act, 2006. Certain exemptions were clearly laid out with regard to what came under the
purview of Fringe Benefit Tax. The Finance Act, 2009, abolished Fringe Benefits Tax
completely, and now such perquisites are taxable in the hands of employees. These may include
value of accommodation, leave travel concession, encashment of non-availed earned leaves,
medical reimbursement and so on.

BIBLIOGRAPHY
 The Income-tax Act, 1961, No. 48, Act of parliament, (India).

 Nimitha salim, Fringe Benefit Tax, http://www.legalserviceindia.com/article/l303-Fringe-

Benefit-Tax.html.

 Thimmaiah B C Thimmaiah, FRINGE BENEFIT TAX -ISSUES AND NUANCES,

(March 2020).
https://www.researchgate.net/publication/339712547_FRINGE_BENEFIT_TAX_-
ISSUES_AND_NUANCES.

 What is Fringe Benefit tax, Business’s Standard? https://www.business-

standard.com/about/what-is-fringe-benefit-tax.

 What is fringe benefit tax & its exemptions?

https://economictimes.indiatimes.com/money-you/what-is-fringe-benefit-tax-its-
exemptions/articleshow/4923931.cms?from=mdr