If you have foreign subsidiaries in India, it might be of interest to know that there has been recently imposed an additional tax burden onto the employers.This extra tax burden is called Fringe Benefit Tax. It was implemented on April 2005 by Finance Minister P Chidambaram.

The rationale for implementing this tax 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 so especially where the expenditure incurred by the employer is ostensibly for purposes of the business but includes, in partial measure, a benefit of a personal nature. Moreover, in cases where the employer directly reimburses the employee for expenses incurred, it becomes difficult to effectively capture the true extent of the perquisite provided because of the problem of cash flow in the hands of the employer.

The fringe benefits is outlined in section 115WB as:
any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment. This includes employee compensation other than the wages, tips, health insurance, life insurance and pension plans.

The following specific types or nature of benefits are taxable under Fringe Benefit Tax:

· entertainment;
· festival celebrations;
· gifts;
· use of club facilities;
· provision of hospitality of every kind to any person whether by way of food and beverage or in any other manner, excluding food or beverages provided to the employees in the office or factory;
· maintenance of guest house;
· conference;
· employee welfare;
· use of health club, sports and similar facilities;
· sales promotion, including publicity;
· conveyance, tour and travel, including foreign travel expenses;
· hotel boarding and lodging;
· repair, running and maintenance of motor cars;
· repair, running and maintenance of aircraft;
· consumption of fuel other than industrial fuel;
· use of telephone;
· scholarship to the children of the employees.

How do we compute the Fringe Benefit tax for the company:
Firstly, we derive the value of fringe benefits incurred namely the total expense deducted in the company’s book. Next, a certain percentage ( varies with the different type of expenses) will be deducted. The difference thereon will be taxed at the rate of 30% (basic rate) + 10% (surcharge)+ 2% (education cess) which is effectively at 33.66% .
As mentioned above, each expenses attracting the fringe benefit tax rate of 33.66% varies from 10 per cent to 50 per cent depending upon the expense incurred: For example, for the use of telephones 10 per cent fringe benefit tax will be charged, while entertainment expenses, festival expenses, gifts, use of club facilities, etc will be taxed at the rate of 50 per cent.
For illustration purpose:
Say, total personal telephone cost in the books amounted to 10,000 rupees. This 10,000 rupee is then tax at 10% ( for this particular expense) which is 1,000 rupees and then multiply by 33.66% to get the fringe benefit tax payable of 33.66 rupees to the Indian government.

Fringe Benefit Tax And Section 115WD Income Tax Act

Section 115WE outlines the procedure for the assessment of the return of fringe benefits filed by the employer and the determination of tax or interest payable or refund due and in either case the issue of intimation to that effect.
An employer liable to pay fringe benefit tax is required to furnish a return of fringe benefits before the due date. Presently, there is no special form issue by the Indian authority. The due date is the same for the company’s submission of its corporate tax.
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.
Also, note that 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.
A new Chapter XII-H is to be inserted in the Income-tax Act containing sections 115W to 115WL, which provides for the levy of additional income tax on fringe benefits.
The chapter is divided into three parts. Part A contains the meaning of certain expressions used, part B enumerates the basis of charge, and part C delineates the procedures for filing of return in respect of fringe benefits, assessment and the payment of tax thereon.
(Notes: Perquisites which can be directly attributed to the employees will continue to be taxed in their hands in accordance with the existing provisions of section 17(2) of the Income-tax Act and subject to the method of valuation outlined in rule 3 of the Income-tax Rules.)

Fringe Benefit Tax in India versus Other countries:

Though India just implemented this tax, for information purposes, other countries like United States, the United Kingdom, Canada, Australia, New Zealand, Japan and some other nations have all along have implemented this tax.
Interestingly, Indian Fringe Benefit Act was modeled based on the Australian standard. The main contrast is that fringe benefit tax is be taxed at between 10 per cent and 50 per cent in India, whereas in Australia it is taxed at a flat rate of 60%.
It is reported that that the fringe benefits tax is likely to result in India Inc incurring an additional expenditure of about Rs 25,000 crore.

Also, be aware of the changes of FBT in the Budget 2006 announcement:

In the budget 2006, the provisions relating to FBT are proposed to be amended as follows:
To exclude from FBT:

1. the sale promotion expenditure in the nature of payment to persons of repute ( brand ambassadors)
2. the expenditure on providing free samples of medicines or medical equipment provided to doctors; and
3. contributions made to approved superannuation funds up INR 100,000 per employee, per year.

To reduce the deemed value of fringe benefits from 20% to 5% of the expenditure on:

1. tour and travel ( including foreign travel)
2. provision of hospitality, use of hotel, boarding and lodging facilities in the case of airlines and shipping companies.

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