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One of the most controversial taxes ever introduced, the fringe benefit tax (FBT) has raised the ire of both companies as well as employees whose job related activities have now been classified as “fringe benefits” and are under the tax authorities’ scanner. The hardest hit are pharma and FMCG companies along with advertising agencies who spend a lot of money on sales promotion, networking and work related travel.
There has been a constant demand by the corporate sector to rollback the tax, which was introduced in Budget 2005-06 by Union finance minister P Chidambaram. It was introduced because as Chidamabram said, “There are many perquisites that are disguised as fringe benefits, and escape tax. Neither the employer nor the employee pays any tax on these benefits which are certainly of considerable material value.”
The government then made necessary changes in the Income Tax Act and defined fringe benefits in section 115WB of the Finance Bill, to mean any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment. It fixed the tax rate at 30% on an appropriately defined base and brought activities such as employers’ expenses on entertainment, travel, employee welfare and accommodation and recreation. The tax was originally levied on employers’ contributions to superannuation funds as well as expenses incurred on employee transport.
However, in Budget 2006-07, the government watered down some of the provisions of FBT to permit companies to provide a few perks to their employees such as a relaxation in exemption limits on contributions to employee pension funds and tax exemptions in case of expenditure by employers on employee transport, free medicine samples and celebrity endorsements. While the tax may seem new to India, it is already levied in the United States, the United Kingdom, Canada, Australia, New Zealand, Japan. The FBT rules proposed by Chidambaram are modeled on the Australian system. The only difference is that in India it is levied at anywhere between 10% and 50%, whereas in Australia it is taxed at a flat rate of 60%.
| Taxing Times ...
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