Assessee defined for fringe benefits

Consequent upon the introduction of the fringe benefit tax, the following amendments have been made in section 2:

Definition of assessee to include an assessee in respect of fringe benefits tax also

Sec 7(a) has been amended to provide that assessee shall mean any person in respect of whom any proceedings under this Act has been taken for the assessment of his income or assessment of fringe benefits or the income of any other person in respect of which he is assessable or of the loss sustained by him or by any such person or the amount of refund due to him or to such other person. The effect of this amendment is that if a fringe benefit tax is payable by any person and any proceeding has been taken under this Act for the assessment of the tax on fringe benefit tax, such person shall be an assessee for the purpose of this Act.

'Fringe benefits' formally defined

A new Clause 23B has been inserted in section 2 to define fringe benefits to mean any benefits referred to in section 115WB.

Complicated law

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. However 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: Employers' 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, "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.

"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 law does not distinguish between the amounts of fringe benefits spent on the employees and the expenditure incurred on non-employees, presumably because the lawmakers thought that if they decided to so segregate the expenditure, though such segregation would be logical, the taxpayers would have a tendency of shifting the expenditure to those heads where FBT is not applicable. This would make the new tax prone to litigations, arising out of the tax payers and the tax gathers trying to interpret the various heads of expenditure in their own way. The law thus covers all possible expenditure where the lawmakers would have presumed that the taxpayer would be hiding his fringe benefits, which has resulted in certain absurd categories of expenditure also being taxed as fringe benefits.

So far so good. But so far as the provisions do not distinguish between amounts which are genuine fringe benefits to the employees, and the amounts which are expenditure not pertaining to the employees, they seem illogical. Simultaneously with taxing the income under the Income Tax Act, this new provision taxes expenditure also, resulting in double taxation. While the model may have been borrowed from countries like Australia and New Zealand, when it comes to taxability of non-employee related expenditure, the Indian law differs considerably from the laws in those countries where the latter has been carefully left out.

The argument of the Finance Minister that this tax would not harm much as it would increase the effective rate of taxation by a mere 1 to 1.5 % in respect of the most companies, is also based on a very faulty logic. It the intention of the tax is to increase the effective rate by a small amount, it would have been appreciated more if he had straightaway increased the rate, without resorting to such complex litigation-prone mechanism.

While the individuals and HUF's have been excluded, a partnership firm would be covered by the law. Some assessees may consider dissolving their partnership firms if the impact of the tax is high on them.

A fund, trust or institution eligible for exemption under section 10(23C) or registered u/s 12AA would be excluded from the provisions of the law. The trusts now will have to be very careful to make sure they continue to remain exempt or registered. The moment they lose such status for any reason, including a technical lapse, the provisions of FBT tax would get attracted. The Circular clarifies that a company registered under section 25 of the Companies Act will also not be liable to FBT if its income is exempt under section 10(23C) or such company is registered under section 12AA of the Income Tax Act.

A company which does not pay any tax because of 'brought forward losses,' or a loss making company or a sick company would also not be spared. In many such cases while the liability to tax would otherwise be zero, there could be substantial tax liability because of FBT.

There is no threshold limit for this tax, thus tax would be attracted on every rupee spent by the employer. Detailed enforcement mechanism, including payment of advance tax, filing of returns, levy of penalty, assessment, reassessment etc has been prescribed for the implementation of the FBT.