When the introduction of the Fringe Benefit Tax caused much commotion, the Finance Minister had given an assurance that the proposals would be revisited, and a milder, more logical version would be introduced.

However, nothing has been done in that direction, and except making some minor changes, the basic structure of the law relating to taxability of fringe benefits remain same as was originally proposed.

The Fringe Benefit Tax is far from simple. It has been the most painful law introduced by the Finance Act, 2005. There are many types of benefits that an employee derives from his employer. Some of the benefits result in tax being paid by the employees, while others, though called fringe, which means marginal, provide an advantage to an employee without having any tax effect.

The avowed objective of FBT is to tax in the hands of the employer the benefits usually enjoyed by the employees, which cannot be attributed to individual employees.

(Budget speech of the Finance Minister) It is these types of benefits that the new law is targeting. Unfortunately, it seems the new law travels beyond what was contemplated by the Finance Minister in his budget speech, and attempts to tax in the hands of employer certain expenditure, which are directly attributable to the employees.

Examples of such expenditure are, employer's contribution to superannuation funds, and free/concessional tickets to employees or their families for their private journeys, in respect of employers engaged in passenger transport.

The Finance Minister argues that this is not a new tax, 'Although I am obliged to call it by a new name, namely, Fringe Benefit Tax. With due respect to the Hon'ble Finance Minister, no such law ever existed in India. A decade back, the law did provide for partial disallowance of certain expenditure with a view to discouraging higher expenditure by businesses, but never before has there been an attempt to tax the expenditure incurred by the assessees.

It may be of interest to know that the law relating to the partial disallowance was repealed by this very Finance Minister on the ground that India no longer needed such restrictive laws.

"The rationale for levying the FBT 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. This is especially so where the expenditure incurred by the employer is ostensibly for the purpose of the business but includes, in partial measure, a benefit of a personal nature. (Memorandum explaining the provisions of the Finance Bill, 2005)

The expenses on which the FBT is attracted can be divided into the following three categories:

Expenditure, which result in collective benefits to the employees

This is the category of expenditure that the Finance Minister had in his mind, while proposing the law for taxability of fringe benefits. 50% of such expenditure is chargeable to tax. This category covers items such as expenses on festival celebrations, use of health club and similar facilities and expenditure on gifts.

Expenditure, which results in individual benefits to employees

Logically the taxability of the expenditure directly attributable to the employees should have been in the hands of the employees directly, the lawmakers decided to tax some of these items in the hands of the employer. These items are liable to tax at 100% of the amount spent. The category includes such items as the concession in the value of tickets borne by the employer for the private journey of the employee, and the amount paid towards the contribution to superannuation fund.

Expenses, which are in the nature of business expenditure

This is a long list of expenditure, which are not fringe benefits though, but would be taxed as such under the provisions of fringe benefits tax. The list includes such expenses as entertainment, provision of hospitality of every kind by the employer to any person (but not to the employees in office or factory, or by paid vouchers), conference, conveyance, tour and travel (including foreign travel), use of hotels, lodging and boarding facilities, repair, running (including fuel) and maintenance of motorcars and aircrafts and amount of depreciation thereon, use of telephone (including mobile phone) maintenance of any accommodation in the nature of guest house. 20% of such expenditure would be chargeable to RBT. This rate is 5% in respect of certain categories of business.

Very interesting observations emerge from the list of expenditure

Expenses on maintenance of guesthouse shall be taxable, though the employees of the company may or may not derive some collective benefits from the guest house maintained by the employer for his business purpose.

Provision of hospitality of every kind to any person is taxable. "Any person" need not be an employee of the company. Thus, the law presumes that even in respect of hospitality extended to the customers of a company, a benefit of personal nature seems to flow to the employees! Even in cases of hotels, 5% of all expenses incurred on provision of hospitality to its customers would be taxable as fringe benefits.

All conveyance, tour and travel expenses, expenses on running and maintenance of cars and aircrafts would be considered fringe benefits. This would be so even in cases of companies, which are in the business of providing travel services to its customers, though, the amount would be 5% in their case instead of 20%.

Fringe benefits are deemed to have been given to employees even in respect of depreciation on motorcars and aircrafts.