Page 243 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes Fringe Benefit Tax (FBT) is a tax levied on perquisites-or fringe benefits -provided by an employer

to his employees, in addition to the cash salary or wages paid. Fringe Benefit Tax was introduced in

India in the year 2005-2006. Fringe Benefit Tax is subject to varying treatment in different countries.
These benefits are either taxed in the hands of the employees themselves or the value of such benefi ts

is subject to a ‘fringe benefit tax’ in the hands of the employer. The rationale for levying a fringe

benefit 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.

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.

Notes A two-pronged approach has been adopted for the taxation of fringe benefi ts under
the Income-tax Act.
Perquisites which can be directly attributed to the employees are taxed in 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 benefit poses problems, or for some reasons,
it is not feasible to tax the benefi ts 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 benefi ts
provided or deemed to have been provided to the employees.
Fringe Benefit Tax may seem new to India, but it’s not a novel concept. This tax is already levied

in the United States, the United Kingdom, Canada, Australia, New Zealand, Japan and some

other nations. The fringe benefit tax rules proposed in the Budget by the finance minister are
modelled on the Australian system. With the only difference that fringe benefit tax is proposed

to be taxed at between 10 per cent and 50 per cent in India, whereas in Australia it is taxed at a

flat rate of 60%.
The taxation of perquisites or fringe benefits provided by an employer to his employees,

in addition to the cash salary or wages paid, is fringe benefi t tax. Any benefits or perks that

employees (current or past) get as a result of their employment are to be taxed, but in this case
in the hands of the employer. This includes employee compensation other than the wages, tips,
health insurance, life insurance and pension plans.

Fringe benefits as outlined in section 115WB of the Finance Bill mean any privilege, service,
facility or amenity directly or indirectly provided by an employer to his employees (including
former employees) by reason of their employment.
They also include reimbursements, made by the employer either directly or indirectly to the
employees for any purpose, contributions by the employer to an approved superannuation
fund as well as any free or concessional tickets provided by the employer for private journeys
undertaken by the employees or their family members.

From a tax savings perspective, fringe benefit planning can achieve considerable results. The

business would be able to deduct the cost of these qualifi ed benefits to save on taxes; yet the

recipient would not have to pay current taxes on the value of the benefi ts received. A “two for
one savings” results, especially for an owner who is also a qualified employee. So a business

owner should have an overview of some of the options in regard to fringe benefi ts, and potential
limitations or caveats. By definition, a fringe benefit is a form of compensation–other than cash–

given to a qualified recipient. Generally speaking, the bulk of the tax-free fringe benefits can be

granted to a qualified recipient who is an employee or to an owner who can also be set up as a

qualifi ed employee.
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