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.
Fringe Benefit Tax (FBT) was levied on the employer, for the value of perquisites provided to the employees. It is charged on the value of benefits that are not included as salary income of the employees. Though it prevented the non-taxation of certain benefits given, it was revoked in 2009, citing the administrative complexities and additional compliance burden for the employer.
This article explains in detail, the meaning, benefits considered as Fringe Benefit Tax, exceptions, and benefits of Fringe Benefits Tax.
The employer is taxed for these benefits given to employees.
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.
Suppose A Ltd., provides the following benefits to its employee Mr.S:
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)
There are certain exclusions made in the act, stating a few benefits are not considered as fringe benefits for income tax purposes. They include:
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.