Fringe Benefit Tax - Applicability, Taxation, Exemptions And Importance

There are various provisions in the Income Tax Act that have been removed, citing the compliance burden and complexities in the hands of the tax payers. One such provision that was removed relates to the concept of Fringe Benefit Tax. It was introduced in the year 2005. Though it prevented the non-taxation of certain benefits given, it was revoked in 2009, citing the administrative complexities and additional compliance burden for the employer.

What Is Fringe Benefit Tax?

• As the name suggests, Fringe Benefit Tax is the tax levied on the benefits provided by the employer to employees in addition to salary. 
• This is a tax which needs to be paid by the employer.
• This is not a tax that is paid on income earned. It is a tax paid as a percentage of the quantum of benefits provided by the employer to an employee (tax on expenses incurred)
• Simply speaking, this is a disallowance in the hands of the employer.

What Is The Intent Behind The Levy Of Fringe Benefit Tax?

• Salary, allowances, perquisites, and other benefits provided are taxable in the hands of the employee under the provisions of the Income Tax Act.
• By disclosing certain employee benefit expenses not as salary in the books, the company was able to claim the expenses. The same amount was also not taxable in the hands of the employee as it is not considered as salary.
• This resulted in non-taxation of employee benefit expenses in the hands of employer and employee.
• To avoid the non-taxation of these benefits, the concept of Fringe Benefit Tax was introduced.

To Whom Fringe Benefit Taxes Are Applicable?

The employer is taxed for these benefits given to employees.

What Are The Benefits Considered As Fringe Benefits?

• The act provides an exhaustive definition of what constitutes fringe benefit. As per section 115WB, fringe benefits means:
  • Any facility provided by means of reimbursement or not
  • Free/concessional tickets provided by the employer apart from official purposes
  • Contribution by employer to approved superannuation funds
  • Any Employee Stock Option Plan or Sweat Equity Shares or similar allotment of shares made by employer to employee - free of cost or at concessional rates
• It includes benefits like entertainment, hospitality, club memberships, gifts, scholarships, etc.

What Is The Rate Of Tax Payable For Fringe Benefits?

Fringe Benefit Tax was taxed at the rate of 30%, with separate surcharge rates for the amount of benefits given and the legal status of the assessee providing fringe benefits. Cess was also levied along with tax rate and surcharge.

Fringe Benefits Tax - An Illustration

Suppose A Ltd., provides the following benefits to its employee Mr.S:

1. Provided free tickets for Mr.S’s family for a tour to Malaysia worth Rs.2,00,000. GST - Rs.36,000. Total invoice Value - Rs.2,36,000
2. Contribution to membership in golf-club Rs. 50,000. 

In the above benefits, (1) is not considered as a part of salary and (2) is considered as a part of salary. 

Tax Treatment:

Since (2) is considered as salary, it would be considered for tax in the hands of employee under the head salary, hence, the incidence of Fringe Benefit Tax in the hands of employer does not arise

Since (1) is not considered as salary, it wont be taxed as salary income in the hands of employee. Therefore, FBT implications arise in this case, in the hands of the employer. FBT of Rs. 60,000 (plus surcharge and cess applicable) needs to be paid by the employer A Ltd., (Rs.2,00,000 *30%). 

It is to be noted that GST component of benefit provided is not considered for tax computation. If included, it would result in cascading effect (situation wherein tax is paid again on tax component)

Are There Any Exclusions/Exemptions Provided From Fringe Benefit Tax?

There are certain exclusions made in the act, stating a few benefits are not considered as fringe benefits for income tax purposes. They include:

• Benefits provided to employees to  fulfil any statutory obligation
• Expenses incurred on reducing hazards, if any, in the workplace
• Providing first aid facilities in the hospital or dispensary run by the employer or
• Providing creche facility for the children of the employee; or
• Sponsoring a sportsman, being an employee, or
• Organize sports events for employees,
• Distribution of free samples or samples at concessional rates

Final Word

Though fringe benefits tax was abolished, the underlying concept of prevention of non-taxation of benefits still resonates with the existing provisions of the act. For instance, shares allotted under the Employee Stock Option Scheme or Sweat Equity Shares were previously considered fringe benefits and taxed in the hands of the employer to prevent non-taxation. Now, the benefit provided is treated as perquisite and taxable in the hands of employees to avoid non-taxation. More similar instances can be cited,  reinforcing the government's commitment to ensuring that these benefits are not exempt from taxation, thus closing any avenues for tax avoidance.