FBT in India – how unique is it?

Three years ago, the finance minister surprised the business world by introducing a new chapter – fringe benefit tax (FT?) in the Indian tax legislation. Faced with staunch criticism, he then came up with a defence by stating that FBT is not new and is operative in many countries viz Australia, New Zealand, the US, the UK, and Canada, to name a few.

The rationale behind the introduction of FBT in India was purportedly, to bring those fringe benefits (?FBs?) within its ambit, which involved a personal element, that is enjoyed collectively by employees and gets neither taxed in the hands of the employee nor the employer. Having said that, the question remains as to whether the FBT law in India is indeed inspired from similar laws prevalent in other countries, or is it a novel concept. Let us examine the incidence of FBT in some of the popular countries, where they co-exist:

US

Here, the FBT law taxes FBs provided to employees as well as to independent contractors. While FBs provided to employees are subject to employment withholding tax and are reported in Form W-2, FBs provided to independent contractors are reported in Form 1099-MISC.

FBs are valued at Fair Market Value i.e. the amount an employee would have to pay to a third party. The US FBT regulations exclude various benefits provided to the employees from its purview viz, accident and health benefits, dependent care assistance, education assistance for degree or business related courses, group term life insurance, athletic/lodging facility in business premises, meals provided in canteen, relocation expenses, and

Employee Stock Option (?ESOP?), amongst others.

UK

A similar system is followed in the UK, where FBs provided to the employees form part of their taxable income. However, the taxability of certain FBs in UK depends upon whether it is paid to the higher paid employees or the directors.

Australia

The Australian Model of FBT, which is rigid and complex, taxes the benefit in the nature of private use of car, debt waiver, cheaper loan, reimbursements, housing accommodation, living away allowance, meals, entertainment, amongst others.

However, unlike India, superannuation contribution and benefit arising from ESOPs are not liable to FBT in Australia. In Australia, the value of FBs provided to employees is grossed up, on which the employer is liable to pay FBT at 46.5%. Deduction of FBT paid is available to the employer from its taxable income, which is not the case in India. However, there is a rigid requirement of maintaining the complete record of FBT for five years. Also, the employer has to report the value of FBs attributable to the employees in their respective wage statement, if it exceeds Australian $2,000 for that employee. It is often believed that the Indian FBT model is based on the Australian model.

However, it is pertinent to note that whereas Indian FBT provisions are enacted to bring in its purview the collective benefits provided to the employees, the Australian model more or less brings the benefits identifiable with the specific employees, which is evident from the requirement of reporting the FBs in the wage statements of the employees.

Whereas, in the US and UK, the FBs are taxed in the hands of the employees, similar to perquisites under Indian regulations, representations have been made in Australia for a reform, so as to simplify and make the FBs taxable in the employees? hands.

Contrary to the general belief that the Indian FBT law has drawn its colours from other country legislations, the fact is that our FBT seems to be more unique than a borrowed concept. Besides, it may be noted that countries where the so called FBT model is in existence are now in the process of phasing it out and are slowly moving towards the Indian ?Perquisite? model, viz of taxing the FBs in the hands of the employees.

Given such a trend in other countries, it remains to be seen whether the Indian FBT law will follow a similar fate. Withdrawal of FBT at this stage seems a difficult proposition, given the significant incremental contribution it has made to the exchequer since its inception. However, a FBT reform that is just and is also comparable to other countries, would be welcome.

The authors are with PricewaterhouseCoopers