fringe benefit 196

7/31/2019 Fringe Benefit 196

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FRINGE BENEFITS


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Fringe benefits are benefits which employees ordirectors receive from their employment butwhich are not included in their salary cheque

or wages. On the tax return form they arecalled 'benefits in kind'. They include suchthings as company cars, private medicalinsurance paid for by the employer and cheap

or free loans.


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The taxation of perquisites -- or fringe benefits -- provided by an employer to his employees, inaddition to the cash salary or wages paid, is

fringe benefit tax. Any benefits -- or perks -- that employees

(current or past) get as a result of theiremployment are to be taxed, but in this case in

the hands of the employer.


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With the notification of the Finance Act,2005, the Fringe Benefit Tax has become alaw and every person falling within thedefinition of employer will now be

required to comply with the provisionsrelating to the Fringe Benefit Tax.


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As per the Finance Bill, fringe benefits shall be deemedto have been provided if the employer has incurredany 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 othermanner, excluding food or beverages provided to theemployees in the office or factory;


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(f) maintenance of guest house;

(g) conference;

(h) employee welfare;

(i) use of health club, sports and similarfacilities;

(j) sales promotion, including publicity;

(k) conveyance, tour and travel, includingforeign travel expenses


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(l) hotel boarding and lodging;

(m) repair, running and maintenance of motorcars;

(n) repair, running and maintenance of aircraft


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(o) consumption of fuel other than industrialfuel;

(p) use of telephone;

(q) scholarship to the children of theemployees.


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The definition of 'Fringe Benefit' under the newchapter XII H (As per subsection (2) of section115 WB of Income Tax Act, 1961), excludes-

a) Any expenditure on or payment through paidvouchers, which are not transferable and usableonly at eating joints or outlets.

b) Meal Pass is exempted from fringe benefit taxfor the employers and is tax free for theemployees

c) Meal Pass can be used for making paymentsboth within and outside office premises.


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Under the proposed provisions, fringe benefit tax ispayable by an employer who is either an individual ora Hindu undivided family engaged in a business orprofession; a company; a firm; an association ofpersons or a body of individuals; a local authority; a

sole trader, or an artificial juridical person. The tax is payable in respect of the value of fringe

benefits provided or deemed to have been provided byan employer to his employees during the previousyear.

The value of fringe benefits so calculated, is subject toadditional income tax in respect of fringe benefits atthe rate of thirty per cent, as provided in section115WA.


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The fringe benefit tax is payable by theemployer even where he is not liable to payincome-tax on his total income computed inaccordance with the other provisions of this

Act. The benefit does not have to be provided by

the employer directly for him to attract fringebenefit tax. fringe benefit tax may still beapplied if the benefit is provided by a thirdparty or an associate of the employer or byunder an arrangement with the employer.


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The taxation of perquisites -- or fringe benefits --provided by an employer to his employees, in additionto the cash salary or wages paid, is subject to varyingtreatment in different countries.

These benefits are either taxed in the hands of theemployees themselves or the value of such benefits issubject to a 'fringe benefit tax' in the hands of theemployer.

The rationale for levying a fringe benefit tax on theemployer lies in the inherent difficulty in isolating the

'personal element' where there is collective enjoymentof such benefits and attributing the same directly to theemployee.


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This is so especially where the expenditureincurred by the employer is ostensibly forpurposes of the business but includes, inpartial measure, a benefit of a personal nature.

Moreover, in cases where the employer directlyreimburses the employee for expensesincurred, it becomes difficult to effectivelycapture the true extent of the perquisiteprovided because of the problem of cash flowin the hands of the employer.


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Therefore, the finance minister has proposed toadopt a two-pronged approach for the taxationof fringe benefits under the Income-tax Act.

Perquisites which can be directly attributed tothe employees will continue to be taxed in theirhands in accordance with the existingprovisions of section 17(2) of the Income-taxAct and subject to the method of valuationoutlined in rule 3 of the Income-tax Rules.


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In cases, where attribution of the personal benefit posesproblems, or for some reasons, it is not feasible to taxthe benefits in the hands of the employee, it isproposed to levy a separate tax known as the fringe

benefit tax on the employer on the value of suchbenefits provided or deemed to have been provided tothe employees.

For this purpose, a new Chapter XII-H is proposed tobe inserted in the Income-tax Act containing sections

115W to 115WL, which provides for the levy ofadditional income tax on fringe benefits.


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levy Fringe Benefit Tax (FBT) on employeestock option plans (ESOPs).

levy service tax on rents of commercial

properties Value the benefit in the form of `tour and

travel' at 5 per cent instead of 20 per cent


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Value the benefit in the form of `hospitality'and `use of hotel boarding and lodgingfacilities', in the case of airline companies andshipping industry, at 5 per cent instead of 20per cent;

Exclude the expenses on free samples ofmedicines and of medical equipmentdistributed to doctors


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Exclude the expenses incurred on brandambassador and celebrity endorsement; and

Prescribe a threshold of Rs 1,00,000 under

section 115WB(1)(c) so that only a contributionby an employer to an approvedsuperannuation fund in excess of Rs 1,00,000per year per employee will attract FBT.


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The IT, ITeS, pharma, FMCG and the insurance sectorshave especially been badly hit.

Slowdown in demand for group superannuationpolicies from corporates after the introduction of fringe

benefit tax.


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Corporate car sales dip


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Thank Q

fringe benefit 196

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