lawyers in India

Fringe benefit tax and emphasis on its constitutional validity

Written by: G.Vardini - 4th year B.A.B.L (Hons.), school of excellence in law, Tamil Nadu Dr.Ambedkar Law University, Chennai
Army Law
Legal Service
  • 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 modeled on the Australian system[1]. 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%[2].

    Reason For Introducing Fringe Benefit Tax:

    Attribution of the personal benefit poses problems, or for some reasons, it is not feasible to tax the benefits in the hands of the employee, thereby, it was proposed to levy a separate tax known as the fringe benefit tax on the employer on the value of such benefits provided or deemed to have been provided to the employees.

    For this purpose, a new Chapter XII-H is proposed to be inserted in the Income-tax Act containing sections 115W to 115WL, which provides for the levy of additional income tax on fringe benefits.

    The chapter is divided into three parts. Part A contains the meaning of certain expressions used, Part B enumerates the basis of charge, and Part C delineates the procedures for filing of return in respect of fringe benefits, assessment and the payment of tax thereon.

    Perquisites which can be directly attributed to the employees will continue to be 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.

    What is Fringe Benefit Tax?

    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 benefit 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.

    FBT will be taxed[3] on-

    (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 other manner, excluding food or beverages provided to the employees in the office or factory;
    (f) maintenance of guest house;
    (g) conference;
    (h) employee welfare;
    (i) use of health club, sports and similar facilities;
    (j) sales promotion, including publicity;
    (k) conveyance, tour and travel, including foreign travel expenses;
    (l) hotel boarding and lodging;
    (m) repair, running and maintenance of motor cars;
    (n) repair, running and maintenance of aircraft;
    (o) consumption of fuel other than industrial fuel;
    (p) use of telephone;
    (q) scholarship to the children of the employees.

    In cases where the employer is engaged in the business of carriage of passengers or goods by motor car or by aircraft, a lower percentage of expenses on repair, running and maintenance of motor cars or aircrafts or fuel expenses has been specified.

    Similarly, for hotels, a lower percentage of the expenses incurred on hospitality has been specified for purposes of calculating the liability under the fringe benefit tax.

    An employer liable to pay fringe benefit tax is required to furnish a return of fringe benefits before the due date as given in Section 115WD.
    Section 115WE outlines the procedure for the assessment of the return of fringe benefits filed by the employer and the determination of tax or interest payable or refund due and in either case the issue of intimation to that effect.

    Who pays Fringe Benefit Tax[4]

    Under the proposed provisions, fringe benefit tax is payable by an employer who is either an individual or a Hindu undivided family engaged in a business or profession; a company; a firm; an association of persons 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 by an employer to his employees during the previous year.
    The value of fringe benefits so calculated, is subject to additional income tax in respect of fringe benefits at the rate of thirty per cent, as provided in section 115WA.

    The fringe benefit tax is payable by the employer even where he is not liable to pay income-tax on his total income computed in accordance with the other provisions of this Act.

    The benefit does not have to be provided by the employer directly for him to attract fringe benefit tax. fringe benefit tax may still be applied if the benefit is provided by a third party or an associate of the employer or by under an arrangement with the employer.

    Explanation of How FBT Will Operate[5]

    # Fringe benefit tax on use of cars, etc-The tax on perquisites like maintenance of a car, club membership, free meals, credit cards and tours and travel, which were earlier taxed in the hands of the employees, has been withdrawn and the employer will now be liable to pay tax on this. Whereby, it will not give any relief to the employees.

    Illustration: In the case of the perquisite value of a car, employees are taxed at a rate ranging between Rs 1,100 (for small cars) and Rs 1,700 a month (for bigger vehicles) in addition to Rs 300 or 500 for a driver provided by the company.

    # It will badly hit the Corporates in India-Reports suggest that the fringe benefits tax will result the Indian incorporations to an additional expenditure of about Rs 25,000 crore.

    # Advertising agencies will be hit by fringe benefit tax-The 30 per cent fringe benefit tax will hurt advertising agencies badly as in this sector about 10% o 12% of an employee's salary comes in the form of perks.

    In the glamorous world of advertising attending conferences all over the world, wining and dining to network with clients and bag more business, etc is the done thing. Now all these expenses will come under the ambit of fringe benefit tax.

    Also, advertising agencies are people-oriented one and staff welfare and salaries account for almost 50 per cent of their expenses. The fringe benefit tax will thus hurt ad agencies badly.

    # Reaction of the Indian Incorporations as to the enactment of FBT-India Inc is quite nervous about the proposed fringe benefit tax and feels that the gains from the reduction in corporate tax announced in the last Budget would be nullified by the cut in depreciation rates.

    # Reaction of Software firms[6]-Some software firms feel that a wide variety of payments would come under the ambit of fringe benefit tax. A recent survey also said that because of the impact of the fringe benefit tax, companies across sectors are likely to cut down on the increments that employees would get. The proposal has invited criticism even from the Institute of Chartered Accountants of India, which has otherwise praised the finance minister for rationalising the tax administration.

    # Small firms might be spared: A Business Standard report said that the finance ministry is considering a threshold staff strength for levying the fringe benefit tax on employers.

    Finance ministry officials indicated that organizations with very few employees could be exempted from the tax. This is based on the assumption that small employers do not spend large amounts on fringe benefits. The ministry will also examine combining the tax return for fringe benefits with the income tax return to avoid the need for filing separate forms, the report said.

    Constitutionality of Fringe Benefit Tax:

    FBT is constitutionally valid as it has come into force by the powers conferred by Indian Constitution through the below Articles:
    1. Article 39: Principles of policy to be followed by the state for securing economic justice- to ensure , the economic system should not result in concentration of wealth and means of production to the common detriment. Whereby, it’s the duty of Centre to take steps for securing economic justice. This new measure is nothing but a step taken by the government as a functional form highlighted under the Article 39 of the constitution.

    2. Article 265: No tax can be levied or collected except by authority of law. The Authority of law means the legislative competence of the legislature imposing the tax. In this case, the Finance Ministry as passed this legislation which has the absolute legislative competence to pass the law.

    3. Article 14: The principle of classification is applied somewhat liberally in case of a taxing statutes.

    “ where the power to tax exist, the extend of the burden is a matter for discretion of the law makers”. The evident indent and general operations the tax legislation is to adjust the burden with the fair and reasonable degree of equality.[7]

    4. Article 270: All taxes and duties referred to in the Union List except the duties and taxes referred to in Article 271 and any tax levied for the specific purposes under any law made by Parliament shall be distributed between the Union and the states.

    5. Article 271: Centre could levy a surcharge on Income tax on non-agricultural income for its exclusive use without sharing with States.
    Hence, Central Government -can levy Tax + Surcharge which is similar to levying Fringe Benefit tax , thereby, it is validated by the constitutional provision (i.e.) through Article 270 and 271

    6. FBT is also constitutionally validated by applying the Schedule VII of Indian Constitution.
    Entry 82- Taxes on income other than agricultural income can be levied by Central Government . Therefore, FBT is nothing but a tax on income.
    Entry 97- Any other matter not enumerated in List II or III including any tax not mentioned in either of those lists.

    “ If however, no entry in any of these lists covers it, then it must be regarded as a matter not enumerated in any of the three lists. Then , it belongs exclusively to parliament under Entry 97 of the Union List as a topic of legislation”. Wherefore, the Expenditure tax also falls in the Residuary Entry as there is no entry in any list under which it can fall. Hence, it is very clear from above constitutional provisions that FBT is a valid one.

    Application of FBT –a dilemma:

    # FBT applies to non-resident employees of the Indian company:
    Indian company is liable to pay for non-resident. As the non-resident employees are none other than the employees who are deputed by the Indian company to go to foreign country. The deputed employees becomes non-resident but still they continue to be the employees of Indian company, therefore, non-resident employees comes within the ambit of employees for whom Indian company is liable to pay tax.

    # This provision is introduced as a presumption tax so as not to avoid incentive accounting practices. There is a possibility of shift of classification of expenditure from one heads of account to another . Therefore, in order to avoid the leakage of tax and evasion of tax this FBT provision has come into play.

    Grounds Cited As An Argument Against The Constitutionality of FBT – An Analysis

    It is to be noted that the following grounds are being cited as an argument Fringe Benefit Tax is unconstitutional. Now, let us just analyse the provisions cited below:
    1. FBT is termed as both arbitrary and discriminatory and is against Article 14 of our constitution. It should be noted that Article 14[8] strikes at arbitrariness and it should involve negation of equality. But FBT has exempted only the charitable institutions, individuals and Hindu undivided family as it satisfies the test of reasonableness and acts as a “right and just and a fair” provision[9].

    2. FBT affects the employees trade and profession as elucidated under Article 19(1)(g)[10] read with Article 301[11] of the Indian Constitution. But this provision of constitution cannot be claimed as a ground as FBT is just a new tax that is enhanced upon the employees and will not have any sort of effect on their profession or employment or trade. This argument is of very weak parlance in nature.

    3. The next that is claimed is that FBT is not a tax on income but on expenditure. But under Entry 97[12]- “Any other matter not enumerated in List II or III including any tax not mentioned in either of those lists can be taxed”. Therefore, the Expenditure tax comes under the purview of taxation and is constitutionally valid.

    Hence, FBT is a legislation made within the ambit of vested to the parliament under List I and List II of the Schedule VII.

    Therefore, from the above we can clearly understand the reason why the center(Finance Ministry) has enacted this Fringe Benefit Tax. This will surely act as a boon as this tax is nothing but an economic security measure that is enhanced by the Government in order to achieve the equality and also increase the government fund through a rightful mean. Hence, FBT is constitutionally valid. Whereby, its time for the Government to make clarifications as to the doubts that has raised in the application of FBT.
    [1] In Australia, when you invite your client to a meal what you spend on your own lunch will attract fringe benefit tax, and not what you spend on your client's lunch, which is marked as business expense.(an illustration)
    [2] Source: Rediff Business Desk dated onMarch 22, 2005
    [3]Given under Section 115WB of Income tax Act, 1961.
    [4]115W. In this Chapter, unless the context otherwise requires,
    (a) employer means,
    (i) a company;
    (ii) a firm;
    24[(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:
    25[Provided that any person eligible for exemption under clause (23C) of section 10 or registered under section 12AA or a political party registered under section 29A of the Representation of the People Act, 1951 (43 of 1951) shall not be deemed to be an employer for the purposes of this Chapter;]
    (b) fringe benefit tax or tax means the tax chargeable under section 115WA.
    [5]Source: Rediff Business Desk dated onMarch 22, 2005
    [6] Now, it acts as a major source of share in service sector and makes a highest contribution in providing employment opportunities and profit earning.
    [7] Hoechst Pharmaceuticals Ltd. .v. State of Bihar AIR 1983 Sc 1019, State of Kerala .v. Aravind Ramkant Modawakr (1999) 7 SCC 400
    [8] Article 14: “No person shall be deprived his life or personal liberty except according to procedure established by law.
    [9] Maneka Gandhi .v. Union of India, AIR 1978 SC 597, R.D.Shetty.v. Airport Authority , AIR 1979 SC 1628
    [10] Article 19(1)(g) : all citizens shall have the right to practise any profession , or to carry on any occupations , trade or business.
    [11] Article 301: Freedom of trade , commerce and intercourse subject to the provisions of this part , trade , commerce, and intercourse throughout the territory of India shall be free.
    [12] Schedule VII List 1 Union List of our Indian Constitution.

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