Clause 37 of the Finance Act 2005 has created the new law relating to taxability of fringe benefits by inserting new sections 115W to 115WL in the Income Tax Act. Recent Circular No. 8/2005 (The Circular) seeks to provide a harmonious, purposive and contextual interpretation of the provisions of the Finance Act, 2005 relating to the Fringe Benefit Tax (FBT) so as to further the objective of this levy. The Circular contains various Frequently Asked Questions (FAQ's), which attempt to explain the scope of the provisions of various sections pertaining to the FBT.

This article discusses in detail the provisions of Fringe Benefits Tax (FBT) in the light of the new Circular.

Justification

The Circular tries to justify that the FBT law, as passed by the Parliament, is a justifiable law. Perhaps the Government knows that subjects have not been able to digest the levy of the new tax and are still not convinced about its applicability, hence the need to again justify the levy in a Circular issued after the passing of the Law.

The Circular gives the following justification

The taxation of perquisites or fringe benefits is justified, both on grounds of equity and economic efficiency. When fringe benefits are under-taxed, it violates both horizontal and vertical equity. A taxpayer, receiving his entire income in cash, bears a higher tax burden in comparison to another taxpayer who receives his income partly in cash and partly in kind, thereby violating horizontal equity. Further, fringe benefits are generally provided to senior executives in the organization. Therefore, under-taxation of fringe benefits also violates vertical equity. It also discriminates between companies which can provide fringe benefits and those which cannot thereby adversely affecting market structure.

While the justification seems logical one shall not fail to notice the inconsistency as one reads through this article since fringe benefits provided to all levels of employees and in many instances some expenses, which can not be termed as fringe benefits by any stretch of imagination, are also brought to tax under the garb of 'deemed fringe benefits.'

Shift to employer based surrogate tax is presumably for the following reasons

Because all benefits cannot be individually attributed to employees, particularly in cases where the benefit is collectively enjoyed because of the present widespread practice of providing perquisites, wherein many perquisites are disguised as reimbursements or other miscellaneous expenses so as to enable the employees to escape/reduce their tax liability, and because of the difficulty in the valuation of the benefits.

Section 115W(a) defines an employer to be a company, a firm, an association of persons or a body of individuals, a local authority and every artificial juridical person, but excluding any fund or trust or institution eligible for exemption u/s 10(23C) or registered u/s 12AA . Section 115WA is the charging section which provides that there shall be levied a fringe benefit tax at 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 other wise.

S. 115WB (1) defines the fringe benefits to mean 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), any free or concessional ticket provided by the employer for private journey of the employees or their family members and any contribution by the employer to an approved superannuation fund of for employees.

Subsection 2 of s. 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.