fbt tax

FRINGE BENEFIT TAXIT’S IMPACT & EFFECTS

WELCOMES YOU

IN

PRESENTATION

ON

Purpose of Fringe Benefit Tax (FBT)§ Extract from Budget Speech

where the benefits are usually enjoyed collectively by the employeesand cannot be attributed to individual employees, they shall be taxed in the hands of the employer.

§ Extract from Explanatory MemorandumThe rationale for levying a fringe benefit tax on the employer lies in the inherited difficulty in isolating the “Personal Element” where there is collective enjoyment of such benefits and attributing the same directly to the employee. Therefore, where attribution of personal benefit poses problem, or for some reason, it is not feasible to tax the benefits 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 benefits provided or deemed to have been provided to the employees.

Purpose of Fringe Benefit Tax (FBT)§ FM’s Reply in Lok Sabha

Therefore, by the presumptive tax method what we are trying to do so is to tax that part which is clearly a perquisite, clearly a benefit but which is going untaxed in the hands of the employer and the employee.

§ FM’s Reply in Rajya SabhaOur calculation shows that effective corporate rate may go up between 1% to 1.5%. ……….to capture expenditure which is otherwise really a perquisite or a fringe benefit, which has escaped taxation, capture it and bring it back to the tax net, so that companies which gives away a large amount of money by way of fringe benefits would have to effectively pay 1% to 1.5% more……...

Overview of FBT§ Effective from Assessment Year 2006-2007 i.e. from 1.4.2005

§Most Employer liable to pay FBT @33.66% [30% FBT + 10% SC & 2% cess]

§ FBT payable on value of Fringe Benefits provided or deemed to have been provided

§ Not a deductible expenditure

§ FBT paid by employer not to be taxed as salary in hands of employee.

§ Payable even though income of employer is exempted under Income Tax Act or in case of

no normal tax liability also.

§ Perquisites which can be directly attributed to the employees will continue to be taxed in

their hands in accordance with the existing provisions

Assessee for the purpose of FBT§ FBT payable by following employers; (Sec 115W(a))

(i) company; (ii) firm; (iii) AOP/BOI (iv) local authority; (v) every artificial juridical person

§ Following employers excluded from FBT(i) individual or HUF (ii) any fund/trust or institution eligible for exemption u/s. 10 (23C) or registered u/s. 12AA (iii) Central and State Governments (even if any of these are in business)

§ Employers also liable for FBTCorporation, PSU, VCC, Foreign Co., Sick Co., Tax Exempted Entity, Presumptive tax entities, Municipality, Local Authority, Mutual Fund, Trade Unions, NGO, sec. 25 Co., Co-operative Soc.

Basis of Charge§ Charge of FBT (section 115 WA)§ In addition to Income Tax charged, there shall be additional

tax (FBT) in respect of fringe benefits provided or deemed to have been provided by an employer to his employeeduring the previous year @30% on the value of such fringe benefits.§ Again, the charging section emphasise on benefits to

employees and the same is in line with FM’s speech and memorandum explaining provisions of Finance Bill. It means other expenditure, not connected with employees, should not be covered under FBT.

Basis of ChargeFringe Benefits (Section 115 WB (1))For the purpose of this chapter, “fringe benefits” means any consideration for employment provided by way of:a) any privilege, service, facility or amenity, directly or indirectly, provided by an employer, whether by way of reimbursement or otherwise, to his employees (including former employee or employees); [However, privilege, service,

facility or amenity excludes perquisites on which tax is paid / payable by employees]

b) any free or concessional ticket provided by employer for privatejourneys of his employees or their family members

c) Any contribution by employer to approved Superannuation fund foremployees

Basis of Charge

Deemed Fringe Benefits (Sec 115WB (2))§ Employer incurring any expense on, or made any

payment for 16 specified purposes. Such expenses/payments shall be deemed to be fringe benefits provided by the employer to his employee

Basis of ChargeRemarksItem Reference

§Would lead to double taxationc) any contribution by the employer to an approved superannuation fund for employees

§ Applicable to those in transport by any mode.

b) any free or concessional ticket provided by the employer for private journeys of hi employees or their family member

§ Value mechanism in 115WB(2) r.w.s. 115WC(3).§ Restricted to expenses incurred during the

course of business

a) privilege, service, facility or amenity, directly or indirectly, provided by an employer

Basis of Charge

ScholarshipClub Facilities

Health Club & Similar Facilities Gifts Festival Celebrations

50%

contribution to superannuation fund

free or concessional ticket for private journey of employees or their family members

100%

Nature of Expenditure & PaymentsValue (% of Expense)

Value of Fringe Benefit (Section 115 WC)

Basis of Charge

FB Value @ 20% of following Expenditure & Payments

Guest house other than training purpose

Sales Promotion including publicity but excluding advertisement

Repairs, Maintenance (fuel) & depreciation of Aircraft

Repairs, Maintenance (fuel) & depreciation of Motor Car

Use of Hotels, Boarding & Lodging

Conveyance, Tour & Travels Employees Welfare

Telephone other than leased linesConference

HospitalityEntertainment

Value of Fringe Benefit (Section 115 WC)

Concessional Value @ 5% instead of 20%

Expenses on Aircraft Carriage of passenger and goods by aircraft

Expenses on Motor Car Carriage of passenger and goods by motor car

Conveyance, Tour & Travels & Hotels, Boarding & Lodging

Manufacture or production of Computer Software or Pharmaceuticals

Conveyance, Tour & Travels Construction

Expenses eligible for Concessional RateEmployer engaged in the business of

Basis of Charge

POSSIBLE VIEWS – FIRST§ Based on the literal language, the entire expense on 16

specified items would be considered value of Fringe Benefit.§ Eg: Entire expenses on distributors conference

participated by only 10 employees would be the value of Fringe Benefit liable for FBT.§ All legitimate business expenditure under the 16

specified head would be considered for value of Fringe Benefit.

POSSIBLE VIEWS – SECOND§ Classify the entire expenses on 16 specified items into four categories

a) Expenditure solely attributable to non-employeesb) Expenditure attributable to employees however incurred exclusively for

business purpose namely, office conveyance, business traveling etc. c) Expenditure attributable to employees where element of personal benefit

cannot be ruled out namely, telephone, mobile, motor car provided to employees, etc.

d) Expenditure partly attributable to employee and partly to non-employee namely, conference of distributors attended by some employees etc.

§ Value of fringe benefit should be restricted to c) and that portion of d) which is attributable to employees.

POSSIBLE VIEWS – SECOND conti..

Reasons in support to the above view………. 1. FM’s Speech – to ascertain the object or purpose behind the legislation, the

speech made by FM can be taken into consideration2. Explanatory Memorandum to Finance Bill – In case of any doubt or

difficulty, these may be used to ascertain the intention of the legislature3. Interpretation of provisions by court – where two views of any

provision are possible, a view which is favorable to assessee should be adopted, Deeming fiction should be strictly read, legal fiction should not be so interpreted as to work un-justice.

4. In interpreting a charging section, the court must avoid such construction of the provisions that leads to double taxation unless that is expressly provided by the statue.

POSSIBLE VIEWS – SECOND conti..

5. Deeming provisions are required to be constructed strictly, therefore Deemed FB, should be strictly construed to cover only expenses pertaining to employees.

6. Charging section covers - fringe benefits provided or deemed to have been provided by an employer to his employee.

7. FM’s reply in Lok Sabha, Rajya Sabha and in Media: no legitimate business expenditure will be taxed.

8. Extract from section 115WB(1) – Fringe Benefit means any consideration for employment provided by way of…….should result in benefit to employee.

9. Extract from section 115WB(2) – deemed to be provided by an employer to employee.

10. Corresponding amendments to section 17(2)(iv) and Rule 3

POSSIBLE DEPARTMENT VIEWS§ FM mentions: It is so simple, pick up totals from ledger.

Ledger totals of 16 specified expenditures would be the value of FB liable for FBT.§ Deeming fiction should be carried to a logical end even if

it creates injustice.§ 16 Specified heads includes expenses unrelated to

employees namely, hospitality by employer to any person, sales promotion including publicity.

Amendments in Perquisite Valuation

Lower of 20% of salary or lease rent paid / payable

Lower of 10% of salary or lease rent paid / payable

Accommodation leased / rented by employer

20% of salary in cities having population existing 4 lakhs15% in other cities

10% of salary in cities having population existing 4 lakhs7.5% in other cities

Accommodation owned by employer

AmendedExisting Nature of Perquisite

Furnishing of Accommodation by employer


§ the value of benefit resulting from the provision of motor car§ the value of traveling, touring, accommodation and any other expenses paid for or

borne or reimbursed § the value of free meals provided by the employer§ the value of any gift or voucher or token in lieu of which such gift may be received§ the amount of expenses including membership fees and annual fees incurred which

is charged to credit card § the value of benefit to the employee resulting from the payment/ reimbursement in a

club§ the valuation of any benefit or amenity, service, right or privilege provided (Residual

category)

Valuation Rules Omitted


§ the perquisite value relating to accommodation in relation to furnishings, on transfer; in hotel and in remote area§ the value of the benefit arising on provision of services of a sweeper, a gardener, a

watchman or a personal attendant§ the value of the benefit resulting from the supply of gas, electric energy or water for

household consumption§ the value of the benefit resulting from the provision of free or concessional educational

facilities§ the value of the benefit resulting from the provision of interest-free or concessional loan§ the value of the benefit resulting from the use of movable assets§ the value of the benefit arising from the transfer of movable assets belonging to the

employer

Valuation Rules Un-changed

Tax Paid / Payable by employee- No FBT

Cross check TDSClub fee, utility bills, drivers salary

U/s. 17(2)(iv) Obligations reimbursed

Cross check TDSAdmitted business use

Use of movable assets, telephone, exgratia payments, bonus

U/s. 17(2)(iii) r. w. rule 3

Not an expense for an employerInterest free loans, transfer of assets

U/s. 17(2)(vi) r. w. rule 3

Taxability as per valuation rulesHousing, Hotel provision, sweeper, servant etc.

U/s. 17(2)(i) to (iv) r. w. rule 3

Employee taxation not affected except u/s. 17(2)(vi)Outside 16 specified items

Salary, Bonus, Commission, etc.On General Principle

RemarksIllustrative ItemsTax Payable by employee

NO Tax Paid / Payable ???

Perquisites to low paid employeesSection 17(2)(iii)

Medical Reimbursement, Medical treatment, Mediclaim

Section 17(2)

Income is below thresholdFinance Act

Free use of laptop / computerRule 3(7)(vii)

Employee at branch is non residentSection 6

Schemes may be voluntaryGratuity, Pension, leave, VRS, PF, HRA, etc.

Section 10

Personal allowanceEmployee welfare?

Allowances for education, hostel, conveyance, transport

Section 10(14)(ii) r.w. rule 2BB(2)

Spent on dutiesNot a perquisite

Daily allowance, helper etc.Section 10(14)(i) r.w. rule 2BB(1)

RemarksIllustrative ItemsSection Reference

Illustrative FBT working – as per second view

0.4 L20 %2 L10 LStockistsConference

1 L20 %5 L10 LTravelling

2 L20 %10 L10 LEmployee Welfare

Taxable valeTaxable vase %Employee related

Total ExpensesExpenses Head

Certain – Doubts? / Clarifications!§ Exclusive personal allowances / reimbursements to individual

employees would continue to be taxed in their hands as perquisites etc.§ Exclusive personal expenses which cannot be identified to

individual employees would be liable for FBT§ Legitimate business expenses incurred/reimbursed by/through/to

employees would ALSO be liable for FBT§ Allowances / reimbursement which are specifically

taxable/exempt under Act/Rules may not be liable for FBT

Certain – Doubts? / Clarifications!§ Expenditure in the nature of specified deemed FB exclusively

paid to outsiders may not be liable for FBT e.g. Conveyance, Entertainment exclusively for Outsiders such as Professionals§ Expenditures which are disallowed in computing business

income of employer should not be made liable for FBT § Though intention of FM as evident from his speech and

memorandum explaining finance bill intends to tax only those benefits which are collectively enjoyed by employees, the provision, as enacted intends to tax legitimate business expenditures also and are likely to create number of controversies and hardships

Controversies – matter of litigation§ Whether amount of expenditure, resulting exclusive into

benefit to non-employees, will be chargeable to FBT? Example: Entertainment to guest, gift to outsiders, conveyance to outsiders etc. ?

§ Whether genuine business expenses with respect to business travel, sales promotion, conference etc. be deemed to have an element of personal benefit to justify levy of FBT ?

Suggested Strategy for Accounting§ Book all the allowances provided to employees which are provided in the

valuation rules or as specified perquisites under the GROUP “Employee Cost” irrespective of whether taxable or exempt

§ Debit expenses reimbursed to outsiders under the head according to their services and not to normal expense head i.e. conveyance toprofessional as Reimbursement to Professional, reimbursement to distributors on participation in conference as conference exp. etc.

§ Debit expenditure reimbursed to employees for official purpose under the respective head i.e. conveyance paid for official purpose toConveyance exp. etc

§ Debit expenditure relating to employees where personal element cannot be ruled out, under GROUP “REIMBURSMENTS” and then account head as per nature of expense e.g. Conveyance expenses

Advance Tax & Interest on delay

15th MarchQuarter ending 31st March

For delay in paying advance tax interest is payable @ 1% P.M on the amount of shortfall till the short fall continues

15th JanuaryQuarter ending 31st December

15th OctoberQuarter ending 30th September

Due DatePeriod

Advance tax is payable @ 30% of the Value of FBT provided duringthe quarter

15th JulyQuarter ending 30th June

Return of FBT§ Every employer paying FB is required to file return of FB on or before

31st October of the assessment year in the case of a Company andsuch person who are required to get their accounts audited under any Act and 31st July in case of other persons.

§ Belated return and revised return can be filed before the expiry of financial year following the relevant assessment year.

§ Interest is payable @ 1% P.M. for delay in filing of return of FB for the period of delay.

§ Apart from the interest payable on late filing of return of FBT, penalty @ Rs.100/- per day can be levied for the period of failure to file the return of FBT within the prescribed time u/s 271FB.

Assessment & Appeals§ Provisions relating to issue of intimation and deemed

intimation, regular assessment and FB escaping assessment are made also applicable to FBT. § Amendments have been carried out in respective

sections relating to Assessment and Appeals.

THANKING YOU

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fbt tax