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Fringe Benefits Tax

The fringe benefit tax in India is levied on the same basis as Australia and New Zealand, two countries that have the most evolved FBT systems. A comparison of India's approach to defining and taxing fringe benefits with that in these two countries is undertaken here.

Fringe Benefits Tax

Lessons from Australia and New Zealand

The fringe benefit tax in India is levied on the same basis as Australia and New Zealand, two countries that have the most evolved FBT systems. A comparison of India’s approach to defining and taxing fringe benefits with that in these two countries is

undertaken here.

RAJALAXMI KAMATH

T
he dust has still not settled over the Fringe Benefits Tax (FBT). A list of FAQs was released by the Central Board of Direct Taxes (CBDT) on August 31 as clarifications to the issues raised by the industry after the presentation of the Finance Bill, 2005. The introduction of the FBT in the Union Budget 200506 is based on the FBT levied in Australia and New Zealand – the two countries with the most evolved fringe benefits taxation system. It would be interesting to compare and contrast our approach to defining and taxing fringe benefits with the way it is done in New Zealand and Australia.

Basis of Charge

The Finance Act of 2005 has introduced chapter XII-H to deal with income tax on fringe benefits. It refers to charging a FBT tax in respect of the fringe benefits provided or deemed to have been provided by the employer to his employees. The tax is payable by the employer. This is in addition to the fringe benefits being taxed under the head, “salary”, at the hands of the individual employee. So the presumption is that those fringe benefits provided by the employer, which are jointly provided and cannot be attributable to specific employees, will be taxed under chapter XII-H.

In New Zealand and Australia, fringe benefits are explicitly recognised as perks or payments given by employers to their employees in a form different from wages and salary. They are taxed at the hands of the employer only. Both these countries make a distinction between attributed (or employee-allocative) and non-attributive (or pooled or shared among employees) fringe benefits. Australia requires that benefits be allocated to the relevant employee. If employees share a benefit, the respective share of the benefit to each of the employees must be allocated. The value of all benefits provided to a particular employee in an FBT year is known as their individual fringe benefits amount. New Zealand has a list of “attributed benefits” and the threshold levels beyond which these benefits have to be attributed. Pooled or shared benefits (below these threshold levels to each employee) are “non-attributable” fringe benefits and attract a flat rate of taxation.

Definition of Fringe Benefits

For India, section 115WB(1) of the Finance Act 2005 defines fringe benefits to be any privilege, service, facility, or reimbursement made directly or indirectly by the employer to his employees. This includes any concessional or free tickets provided by the employer for private journeys of his employees and family members and contributions to approved superannuation funds. Subsection (2) of this section goes on to define 17 categories of fringe benefits “deemed” to have been provided by the employer. This includes expenses like entertainment and festival expenses, gifts, maintenance and accommodation in guest houses, conference expenses, sales promotion including publicity, conveyance, tour and travel, repair, running and maintenance of motor cars and aircrafts, etc.

The basic difference between subsections (1) and (2) of this section is for the purposes of valuation of the fringe benefits. For the items in subsection (2) – deemed to be fringe benefits – the whole amount is not taxable, but for each of these items a proportion has been specified, which is evaluated to be the fringe benefits provided, e g, 20 per cent of the total expenses on conveyance, tour and travel, including foreign travel, hotel boarding and lodging, repair, running and maintenance of motor cars and aircrafts will be valued as fringe benefits and liable to the fringe benefits tax. Similarly, 50 per cent of the expenses made on entertainment, festival celebrations, gifts, food and beverages, use of club facilities and guest house facilities, conference, use of health club and other similar facilities will be evaluated as fringe benefits and subject to the FBT. The contention in this Act is that the items in subsection (2) of this section are recognised as expenses being carried out in the course of employer’s business and therefore will be allowed as deductions from profits and gains from business and profession. A proportion of them however, will be “deemed” to be fringe benefits provided jointly to its employees and will be taxed as such.

New Zealand has five main groups of fringe benefits: motor vehicles, low interest loans, free, subsidised or discounted goods and services, employer contributions to pension and other funds, others, which includes gifts, telecommunication and entertainment expenses incurred for private purposes by the employees. Australia has a list of 13 categories of fringe benefits, which includes: car fringe benefits, debt waivers, loans, expenses, housing, airline transport, board, meal entertainment, car parking, etc. For each of the five categories stated above, the New Zealand tax law also specifies when these benefits can be exempt. Under motor

Economic and Political Weekly January 14, 2006 vehicles as fringe benefits, for example, work related motor vehicles and vehicles not intended for private use are exempt. Under entertainment expenses, only those expenses that the employees choose to consume outside of their employment duties are subject to FBT. Entertainment expenses, carried out as a part of their employment duties, will come under the rules of entertainment expenses. Australia also has a more detailed list of benefits not liable to the fringe benefit tax, called “exempt benefits”. Under cars, for example, any private use of vehicles that is limited to travel between home and work, travel incidental to the course of performing employment related duties, and minor, infrequent and irregular use even for nonwork-related use is exempt. Other exempt benefits include payments made by the employer for certain child care facilities for children of employees, food and drink supplied on premises or worksite, provision of work related items like stationery, mobile phone or car-phone, computers, etc, subscription made to trade and professional journals, etc. For both New Zealand and Australia, the cost of providing these fringe benefits, as well as the fringe benefit taxes paid are deductible business expenses. In India, no deduction is being given for the fringe benefit taxes paid.

Rationale behind the FBT

The rationale for the FBT in Australia and New Zealand was clear – it sought to replace the income tax law taxing fringe benefits at the hands of employees. This approach of taxing fringe benefits at the hands of employees, as is being followed in several countries, has proved to be very difficult to enforce. The provision of fringe benefits in lieu of salaries and wages to employees escaping from the tax net had accelerated. The FBT was brought in, as it was seen that the only way taxing these benefits was at the hands of the employers. The New Zealand approach was somewhat more restrictive as compared to Australia’s. Only those benefits specified in the legislation, subject to the relevant exclusions were taxed. Australia has cast a wider net. The Australian legislation also operates more on an “exclusions” basis. The intent of the law in both these countries is clear. Fringe benefits are seen as perks, rights, privileges, service or facility given to the employees in addition to their salary or wages. There is an onus on the part of the employer to apportion these benefits to the employees. In the case of items like transport and car fringe benefits – there is a clear-cut demarcation made regarding the use of these facilities for work related purposes and private purposes.

In India, the motives of the policy-makers appear mixed. Fringe benefits, which can be attributed to individual employees, continue to be taxed under salary income of employees. In addition, a broad range of expenses carried out in the course of business is given, which are “deemed” to be fringe benefits. The presumption is that these are fringe benefits that are of a pooled or a collective nature and cannot be attributed to individual employees and so have to be taxed at the hands of the employer. However, there is no intent to separate out the “personal” element of these business expenses, i e, enjoyed by the employees for their private use/benefit, from the “work-related” element. An ad hoc proportion of these expenses is to be evaluated as fringe benefits and subject to a flat rate of 30 per cent tax. To run through some examples, in India all travel-related expenses undertaken by the employees of a company, except that from place of work to residence and back, whether in a company’s vehicle or otherwise, will be subject to fringe benefits tax either under 115WA(2)(K),(M) and (N) – conveyance, tour and travel including foreign travel and repair, running and maintenance of motor cars and aircrafts (at a proportion of 20 per cent of the total amount).

New Zealand would require the company (a) to make a distinction between its private vehicles (subject to FBT) and work related vehicles (not subject to FBT). Where such distinction is not possible, records should be kept by the company to claim exemption from FBT for work-related use of the vehicle. Australia on the other hand, has listed circumstances under which private use of a car may be exempt from FBT: (a) travel between home and work

(b) travel incidental in the course of employment related duties, and (a) nonwork related use that is minor, infrequent and irregular. Private travel, including foreign travel to obtain medical treatment or on concessional grounds is also exempt from FBT in Australia. In India, all telephone expenses are “deemed” fringe benefits, 10 per cent of which are liable to tax. In New Zealand if the employer pays for the employee’s private telecommunications use – these may be subject to FBT. In Australia, provision of a mobile phone or car phone by the employer to his employees and primarily used for work, attracts exemption from FBT.

These examples do suggest that most business expenses deemed to be fringe benefits under the Finance Act – 2005 are of an ambiguous nature, and meticulous logs and records have to be maintained to separate out the personal elements from the work-related elements. Therefore, having an ad hoc evaluation as subject to FBT can be justified on grounds on simplicity. However, the principle of vertical equity can come under question here. Most service-oriented companies would run a much higher travel and telecommunication bill as compared to manufacturing concerns. Having an ad hoc levy of 20 per cent or 10 per cent would be inimical to them. The only grounds on which such an ad hoc levy can be justified (apart from the most obvious reasons of revenuegarnering) is that routine practices of taxassessing officers of adding back some part of these business expenses as being expenses of a personal nature has now been legitimised.

Some Pay-offs

The FBT was not welcomed when first enforced in Australia in 1985. Concessions and exemptions have greatly softened the effectiveness of the tax there. In India too, the door seems to wide open for judicial parleys between the Income Tax Department and the assessees with their chartered accountants, especially with regard to the ad hoc nature in which the business expenses deemed to be fringe benefits have been defined. However, despite that the Australians found that the revenue yield greatly exceeded expectations. Perhaps this tax was introduced with hopes for a similar revenue result in India, at least in the short run. However, in the long run the actual incidence of this tax will not differ much – whether taxed in the hands of employers or employees. One expects that most of these fringe benefits given by employers will be “cashed-out”. This perhaps was the intention of the mandarins in the ministry of finance , given the dose of tax exemptions working largely in favour of salaried personnel in the private sector. However, this has to be weighed against the genuine consternation of business-chambers and companies across the country interested in giving benefits to their workers.

EPW

Email: rajalaxmi@igidr.ac.in

Economic and Political Weekly January 14, 2006

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