Fringe Benefit Tax (FBT)

When we look at our salary, we think about tax. Any income received is taxable. But in some cases the tax is borne by the employer on behalf of us. These cases mostly come under fringe benefit tax.

What is fringe benefit?

The taxation of fringe benefits provided by an employer to his employees, in addition to the cash salary or wages paid, is fringe benefit tax.

Any benefits or perks that employees get as a result of their employment are to be taxed, but in this case in the hands of the employer.

This includes employee compensation other than the wages, tips, health insurance, life insurance and pension plans.

Fringe benefits as outlined in Income tax act mean any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees by reason of their employment.

They also include reimbursements, made by the employer either directly or indirectly to the employees for any purpose, contributions by the employer to an approved superannuation fund as well as any free or concessional tickets provided by the employer for private journeys undertaken by the employees or their family members.

We have got a fair idea of what is fringe benefit, but are all items included in the fringe benefits? As per the Income Tax Act the following items are covered:

• Employer's expenses on entertainment, hospitality, sales promotion and publicity, employee welfare, conveyance, tour and travel (including foreign travel) and use of hotels.
• Employer's provision of employee transportation to work or a cash allowances for this purpose.
• Employer's contributions to an approved retirement plan
• Employee stock option plans (ESOPs)
• Use of telephones, including mobile phones
• Expenses on festival celebrations, use of clubs, scholarships and so on.
• Repairs and maintenance of cars
• expenses on club facilities
• Scholarship to children of employees
• Conference
• Gifts

So how is fringe benefits tax beneficial to employees? If it was taxed to the employee, it would have been at the slab rate in which the individual falls. But in this case it would be at a fixed rate and that too at a much lower rate. Currently the effective FBT rate is around 2%. Isn’t that wonderful?

Who pays fringe benefit tax?

Under the provisions, fringe benefit tax is payable by an employer.
The tax is payable in respect of the value of fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year.

The value of fringe benefits so calculated, is subject to additional income tax in respect of fringe benefits, as provided by the Income Tax Act.

The fringe benefit tax is payable by the employer even where he is not liable to pay income-tax on his total income computed in accordance with the other provisions of this Act.

The benefit does not have to be provided by the employer directly for him to attract fringe benefit tax. Fringe benefit tax may still be applied if the benefit is provided by a third party or an associate of the employer or by under an arrangement with the employer.

Will phone bills invite fringe benefit tax?

Yes. For telephone expenses, the Act assumes that 10 per cent of all calls made from an office are by employees for personal reasons, while for fuel; the extent of use by employees has been taken at 20 per cent.

What about fringe benefit tax on use of cars, etc?

The tax on perquisites like maintenance of a car, club membership, free meals, credit cards and tours and travel, which were earlier taxed in the hands of the employees, has been withdrawn and the employer is liable to pay tax on this.