The most talked about proposal in the Union Budget has been the attempt of the Finance Minister to tax certain expenditure in the garb of taxability of common fringe benefits. This article analyses the provisions and explains how the proposed law, if implemented in the form it has been drafted presently, is likely to prove to be a Draconian law.

Clause 37 of the Finance Bill, 2005 seeks to propose the law relating to taxability of fringe benefits, by proposing new sections 115W to 115WL in the Income Tax Act.

Section 115W(a) defines an employer to be an individual, a Hindu Undivided Family, a company, a firm, an association of persons or a body of individuals, a local authority and every artificial juridical person.

Section 115WA is the charging section which provides that there shall be levied a fringe benefit tax @ 30% on the fringe benefits levied or deemed to be levied by an employer to his employee.

Clause (2) of section 115W clarifies that fringe benefit tax shall be payable by an employer even if he is not liable to pay income tax otherwise. Section 115WB (1) defines the fringe benefits to mean any privilege, service, facility or amenity, directly or indirectly, provided by an employer to an employee by reason of his employment, or any reimbursement made by an employer directly or indirectly for any purpose, or any free or concessional travel ticket for private journeys, or any contribution by an employer towards an approved superannuation fund.

Subsection 2 of Section 115WB provides that fringe benefit tax shall be levied even when activity is carried on, not with an intention of deriving profits or gains, and lists out the following 17 categories of expenses, and an employer shall be deemed to have been provided the fringe benefits if he incurs such expenses. The expenses specified are:

1. Entertainment;
   
2. Festival celebrations;
   
3. Gifts;
   
4. Use of club facilities;
   
5. Provision of hospitality by the employer to any person, excluding expenditure on provision on food to employees in office or factory premises;
   
6. Maintenance of guest house;
   
7. Conference;
   
8. Employee welfare;
   
9. Use of health club, sports and similar facilities;
   
10. Sales promotion including publicity;
    
11. Conveyance, tour and travel;
    
12. Hotel, boarding and lodging;
    
13. Repair, running and maintenance of motorcars;
    
14. Repair, running and maintenance of aircrafts;
    
15. Consumption of fuel other than industrial fuel;
    
16. Use of telephone;
    
17. Scholarship to the children of the employees;

Sub-section. 3 of Section 115WB clarifies that the benefits do not include perquisites in respect of which tax is payable by the employee or any benefit in the nature of free or subsidised transport or allowance for travel from residence of the employee to his office.

As per Section 115WC(1) the fringe benefit shall be the aggregate of the following:

• In respect of free or concessional ticket provided for personal travel, 100% of the cost at which such service is provided by the employer to public, reduced by the cost recovered from the employee;
• In respect of employer's contribution to superannuation fund, 100% of such expenditure;
• In respect of entertainment expenses, festival celebration expenses, gifts, use of club facilities, provision of hospitality, maintenance of guest house, conference, employee welfare, use of health clubs, and sales promotion: 50% of such expenditure; (if the employer is engaged in hotel business, this will be 5% in respect of provision of hospitality);
• In respect of conveyance, tour and travels, hotel, boarding and lodging, repairs running and maintenance of motor cars, and aircrafts, consumption of fuel: 20% of such expenditure, this amount shall also include depreciation in respect of car and aircraft (if the employer is engaged in the business of carriage of goods of passengers by car or aircrafts, the fringe benefit shall be 5% of such expenditure);
• In respect of use of telephone, 10% of such expenditure;
• In respect of scholarship, the actual amount of expenditure incurred

Section 115WD casts a duty upon every employer to furnish a return of income before the due date, which is prescribed as the same date, as prescribed U/S 139(1). The section also makes provision for issue of notice by assessing officer in case the assessee does not furnish a return of income, and also provides for the revised returns. Sections 115WE, WF, WG, and WH lays down detailed procedure for assessment, best judgment assessment and assessment of fringe benefits escaping assessment.

Section 115WJ casts a duty on the assessee to pay an advance tax of 30% of the fringe benefit tax, quarterly, on or before the 15th of the month subsequent to the last month of the quarter, but the advance tax for the quarter ending 31st March shall be payable by the 15th of March! The assessee shall be liable to pay interest on the shortfall of the advance tax.

An analysis of the fringe benefit tax
Fringe Benefit Tax - An Act within the Act