STUDY NOTE - 18

FRINGE BENEFIT TAX

This Study Note includes

• Various Provisions relating to Fringe

18.1 FRINGE BENEFIT TAX

Background:

In India prior to A.Y. 1998-99 some perquisites/fringe benefits were included in salary in terms
of section 17, as also large numbers of fringe benefits were taxed by employer based disallow-
ance method on presumptive basis. However on account of large scale litigations such provi-
sions were withdrawn by Finance Act, 1997, which according to the legislature has resulted in
significant erosion of tax base and also resulted in horizontal and vertical violation of equity. It
is in this backdrop the legislature has introduced a levy of tax on such benefits and perquisites
enjoyed by employees viz. “Fringe Benefit Tax” (FBT). The law of FBT has been introduced for
the first time by the Finance Act, 2005 applicable w.e.f. A.Y. 2006-07. It is contained in Chapter
XII-H having sections from 115W to 115WL.

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 benefits and attributing
the same directly to the employee. This is so 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 perqui-
site provided because of the problem of cash flow in the hands of the employer.

FBT Basis:

A person being an ‘Employer’ is liable to pay FBT.

The tax base for the purposes of FBT is the value of fringe benefits provided or deemed to have
been provided by an employer to his employees during the previous year. The determination
of the tax base comprises three elements:
(a) the scope of the term ‘fringe benefits provided’;
(b) the scope of the term ‘fringe benefits deemed to have been provided’; and
(c) the basis of valuation of (a) and (b).

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 Fringe Benefit Tax

Value of fringe benefits is to be worked out on a presumptive method and based on certain
expenditure heads, value has been prescribed. Such a value is to be adopted irrespective of
actual element of fringe benefits.

Employer

The FBT is payable by an employer irrespective of the fact whether or not he is liable to pay
income tax.

The term employer as per section 115W (a) means:

(i) a company;
(ii) a firm;
(iii) an association of persons or a body of individuals, whether incorporated or not;
(iv) a local authority; and
(v) every artificial juridical person, not falling within any of the preceding sub-clauses:

However the following persons are excluded from the definition of ‘Employer’:

(a) any person eligible for exemption under clause (23C) of section 10
(b) any person registered under section 12AA
(c) a political party registered under section 29A of the Representation of the People Act,
1951 (43 of 1951)
(d) shall not be deemed to be an employer for the purposes of this Chapter;]

Further, the definition has not expressly covered (a) the Central Government and (b) any state
government and therefore, these are not liable for FBT.

Any person not employing any employee cannot be an ’employer’ and is liable for FBT.
Charge of fringe benefit tax (Section 115WA):

(1) In addition to the income-tax charged under this Act, there shall be charged for every
assessment year commencing on or after the 1st day of April, 2006, additional income-tax
called as ‘fringe benefit tax’ (FBT) in respect of the fringe benefits provided or deemed to
have been provided by an employer to his employees during the previous year at the rate
of thirty per cent on the value of such fringe benefits.

(2) Notwithstanding that no income-tax is payable by an employer on his total income com-
puted in accordance with the provisions of this Act, the tax on fringe benefits shall be
payable by such employer.

256 Applied Direct Taxation

 Meaning of Fringe Benefits [Section 115 WB (1)] and Valuation [Section 115 WC]:
Meaning of Fringe Benefits Value of Fringe Benefits
“Fringe Benefits” means any consideration for employment
provided by way of
(a) any privilege, service, facility or amenity, directly or [Not prescribed. It
indirectly, provided by an employer, whether by way of appears that items
reimbursement or otherwise, to his employees covered are specified in
(including former employee or employees) sub section (2)]
(b) any free or concessional ticket provided by the employer Cost at which provided to
for private journeys of his employees or their family general public less
members; [and] amount recovered from
employee, if any
(c) any contribution by the employer to an approved Actual amount of
superannuation fund for employees [; and] contribution in excess of
Rs. 1,00,000/- per
employee
(d) Any specified security or sweat equity shares allotted or Fair market value of the
transferred, directly or indirectly, by the employer free specified security or sweat
of cost or at concessional rate to his employees including equity shares on the date
former employee or employees.* 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 share*

* For the purpose of FB of security or sweat equity shares, the following explanations apply:
(i) “specified security” means the securities as defined in clause (h) of section 2 of the Securi-
ties Contracts (Regulation) Act, 1956 (42 of 1956) and includes employees’ stock option;
(ii) “Sweat equity shares” means equity shares issued by a company to its employees or direc-
tors at a discount or for consideration other than cash for providing know-how or making
available rights in the nature of intellectual property rights or value additions, by what-
ever name called.
(iii) fair market value” means the value determined in accordance with the method as may be
prescribed by the CBDT
(iv) “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;

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Fringe Benefit Tax

D eem ed Fringe Benefits [Section 115 W B (2)] and Valu ation [Section 115 W C ]:
M eanin g of Fringe Ben efits V alue of Fringe Benefits
(Percentage of Expenditure)
The frin ge benefits shall be deem ed to have been provided by the
em ployer to his em ployees, if the em ployer has, in the course of
his business or profession (including any activity w hether or not
such activity is carried on w ith the object of deriving incom e,
profits or gains) incurred any expense on, or m ade any paym ent
for, the follow ing purp oses, nam ely:—
(A ) Entertain m ent; 20%
(B) Provision of hospitality of every kind to any person, in the 20%
nature of, provision of food or beverages or in any other (5% in case if the em ployer
m anner and w hether or not such prov ision is m ade by reason is in the business of H otel,
of any express or im plied contract or custom or usage of Carriage of Passenger or
trade. Goods by A ircraft or by
N o FBT is payable on (i) expenditure on food or beverages Ship)
provided by the em ployer to his em ployees in office or
factory; H ow ever, reim bursem ent to em ployee for this
purpose is not exem pt from FBT and (ii) expenditure on paid
vouchers w hich are not transferable and usable only a t eating
joints or outlets

(C) Conference (other than fee for participation by the em ployees 20%
in any conference).

Explanation:— For the purposes of this clause, any

expenditure on conveyance, tour and travel includ ing foreign
trave, on hotel, or board ing and lodging in connection w ith
any conference shall be deem ed to be expenditure incurred
for the purposes of conference;
(D ) Sales prom otion includ ing publicity: 20%
N o FBT is payable on (i) Expend iture (including rental) on
advertisem ent of any form in any print (including journals,
catalogues or price lists) or electronic m edia or transp ort
system ; (ii) Expend iture on the holding of, or the
participation in, any press conference or business convention,
fair or exhibition; (iii) Expend iture on sponsorship of any
sports event or any other event organised by any
G overnm ent agency or trade association or body; (iv)
Expend iture on the pub lication in any print or electronic
m edia of any notice required to be published by or un der any
law or by an order of a court or tribunal; (v) Expend iture on
advertisem ent by w ay of signs, art w ork, painting, banners,
aw nings, direct m ail, electric spectaculars, kiosks, hoardings,
bill boards, display of products] or by w ay of such other
m edium of advertisem ent; (vi) Expend iture by w ay of
paym ent to any advertising agency for the purposes of
clauses (i) to (v) above; (vii) Expend iture on distribution of
free sam ples of m edicines or of m edical equipm ent, to
doctors (viii) Expend iture on distribution of sam ples either
free of cost or at concessional rate; and (ix) Expenditure by
w ay of paym ent to any person of repute for prom otin g the
sale of good s or services of the business of the em ployer,

258 Applied Direct Taxation

 (E) Employees’ welfare. 20%

No FBT is payable on (i) expenditure incurred to fulfill any

statutory obligation (ii) mitigate occupational hazards (iii)
provide first aid facilities in the hospital or dispensary run by
the employer
(F) Conveyance 20%
(5% in case where the
employer is in the business
of construction,
manufacture and production
of
pharmaceuticals or
computer
software)
(G) Use of hotel, boarding and lodging facilities 20%
(5% in case where the
employer is in
the business of manufacture
or production of
Pharmaceuticals,
computer software or
Carriage of
Passenger or Goods by
Aircraft
or by Ship)
(H) repair, running (including fuel), maintenance of motor cars 20%
and the amount of depreciation thereon (5% in case where the
employer is in
the business of Carriage of
Passenger or Goods by
Motor
Car)
(I) repair, running (including fuel) and maintenance of aircrafts 20%
and the amount of depreciation thereon (Nil in case where the
employer is in
the business of Carriage of
Passenger or Goods by
Aircraft)
(J) use of telephone (including mobile phone) other than 20%
expenditure on leased telephone lines
(K) Maintenance of any accommodation in the nature of guest 20%
house other than accommodation used for training purposes
(L) festival celebrations 50%
(M) use of health club and similar facilities 50%
(N) use of any other club facilities 50%
(O) Gifts 50%
(P) Scholarships 50%
(Q) tour and travel (including foreign travel) 5%

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 Fringe Benefit Tax

No FBT:
1. The privilege, service, facility or amenity in respect of which tax is paid or payable by the
employee, the employer is not liable to pay FBT.
2. No FBT is payable on any benefit or amenity in the nature of free or subsidised transport
or any such allowance provided by the employer to his employees for journeys by the
employees from their residence to the place of work or such place of work to the place of
residence.
[Section 115WB(3)].

Return of fringe benefits (Section 115WD)

1. An employer who is liable to pay FBT during the previous year is required to furnish a
return of fringe benefits in the prescribed Form [ITR 5/6/7/8 as applicable] and manner
to the Assessing Officer before the due date.’ Due Date’ means: In the case of a company or
an employer other than a company whose accounts are required to be audited, 31st of
October of the assessment year. In the case of any other employer, 31st of July of the as-
sessment year.

2. Notice to Furnish Return:

After the due date, the Assessing Officer may issue a notice to the assessee requiring him to
furnish a return in the prescribed form and manner within a period of thirty days.

3. Belated Return:

Any employer responsible for paying fringe benefit tax who has not furnished a return within
the time allowed under sub-section (1) or within the time allowed under a notice issued under
sub-section (2), may furnish the return for any previous year, at any time before the expiry of
one year from the end of the relevant assessment year or before the completion of the assess-
ment, whichever is earlier.

4. Revised Return:

If any employer, having furnished a return under sub-section (1), or in pursuance of a notice
issued under sub-section (2), discovers any omission or any wrong statement therein, he may
furnish a revised return at any time before the expiry of one year from the end of the relevant
assessment year or before the completion of the assessment, whichever is earlier.

5. Interest (Section 115WK):

Failure to furnish a return of fringe benefits or delayed filing of such return will result in the
levy of Interest at the rate of 1% per month. It is for a period from conclusion of the due date till
the date of filing of the return or if no return is filed, till the assessment is made. It is charged on
the amount of FBT payable on assessment less advance FBT paid.

260 Applied Direct Taxation

Assessment (Section 115WE).

The Assessing Officer is required to make an assessment of the return of fringe benefits fur-
nished by the employer under section 115WE and determine the tax or interest payable by him
or refund due to him. The procedure for assessment under this section is similar to the corre-
sponding provisions for assessment of a return of income under section 143 of the Act.

Best Judgment Assessment (Section 115WF)

Where the employer fails to furnish a return of fringe benefits or fails to comply with the terms
of a notice issued under section 115WD(2), or after furnishing the return fails to comply with
the notices issued under section 115WE(2), the Assessing Officer is required to make the as-
sessment to the best of his judgment under section 115WF after giving the assessee a reason-
able opportunity of being heard. The provisions of section 115WF correspond to the provisions
of section 144 in relation to assessment of a return of income.

Fringe Benefit Escaping the Assessment (Section 115WG)

Where the Assessing Officer has reason to believe that any fringe benefits chargeable to tax
have escaped assessment for any assessment year, this section provides for the reassessment of
such fringe benefits which have escaped assessment. This provision corresponds to section 147
of the Act in relation to income escaping assessment.

Issue of notice where fringe benefits have escaped assessment (Section 115WH)

Assessing Officer should serve a notice on the assessee before making an assessment or reas-
sessment under section 115WG requiring the assessee to file a return in the prescribed form
and manner. The notice can be issued after the Assessing Officer records his reasons in writing
for doing so. However, no notice can be issued for an assessment year beyond 6 years from the
relevant assessment year. Further, in a case where the assessment has been completed under
sub-section (3) of section 115WE or section 115WG for the relevant assessment year, the As-
sessing Officer cannot issue a notice for reopening the assessment after the expiry of 4 years,
without the approval of the Chief Commissioner or the Commissioner.

Advance tax in respect of fringe benefits

1. The FBT shall be payable in advance during any financial year, in accordance with the
provisions of section 115WJ in respect of the fringe benefits provided during the current
previous year (Section 115WI).
2. Every assessee who is liable to pay advance tax under section 115WI shall on his own
accord, pay advance tax on his current fringe benefits calculated in the manner laid down
(Section 115WJ).

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 Fringe Benefit Tax

4. Advance tax on the current fringe benefits shall be payable by

(a) all the companies, as specified in Table I below :

TABLE-1
Due date of installment
Advance FBT payable
On or before:
the 15th June Not less than fifteen per cent of such advance tax.
the 15th September Not less than forty-five per cent of such advance tax as
reduced by the amount, if any, paid in the earlier
installment.
the 15th December Not less than seventy-five per cent of such advance tax as
reduced by the amount or amounts, if any, paid in the
earlier installment/s.
the 15th March The whole amount of such advance tax as reduced by the
amount or amounts, if any, paid in the earlier
installment/s

(b) all the assessees other than companies as specified in Table II below :

TABLE-II

Due date of installment

Advance FBT payable
On or before:
the 15th September Not less than thirty per cent of such advance tax.
the 15th December Not less than sixty per cent of such advance tax as reduced by
the amount, if any, paid in the earlier installment.
the 15th March The whole amount of such advance tax as reduced by the
amount or amounts, if any, paid in the earlier installment/s

5. Interest on failure to pay advance tax

In case of failure to pay or shortfall in payment of the FBT in a particular quarter, will attract
interest at the rate of 1% on the shortfall, for each month or part of the month for which such
shortfall continues.

6. Where an assessee has failed to pay the advance tax payable by him during a financial
year or where the advanced tax paid by him is less than ninety per cent of the tax assessed
under section 115WE or section 115WF or section 115WG, the assessee shall be liable to
pay simple interest at the rate of one per cent per month, for every month or part of a
month comprised in the period from the 1st day of April next following such financial
year to the date of assessment of tax under section 115WE or section 115WF or section
115WG.

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Recovery of fringe benefit tax by the employer from the employee (Section 115WKA)

Notwithstanding anything contained in any agreement or scheme under which any specified
security or sweat equity shares referred to in clause (d) of sub-section (1) of section 115WB has
been allotted or transferred, directly or indirectly, by the employer on or after the 1st day of
April, 2007, it shall be lawful for the employer to vary the agreement or scheme under which
such specified security or sweat equity shares has been allotted or transferred so as to recover
from the employee the fringe benefit tax to the extent to which such employer is liable to pay
the fringe benefit tax in relation to the value of fringe benefits provided to the employee and
determined under clause (ba) of sub-section (1) of section 115WC.

Application of other provisions of the Income-tax Act, 1961 (Section 115WL)

Save as otherwise provided in this Chapter, all other provisions of the Income-tax Act shall, as
far as may be, apply in relation to fringe benefits also.

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