In case additional income tax on fringe benefits (FBT) is considered proper and valid then simple way is to tax employers @ 5- 7% of total employees cost and exempt all employees from paying tax on salary and perquisites to achieve simplification and result orientation.

[C.A. DEV KUMAR KOTHARI]

Fringe Benefit Tax:

Vide the Finance Act, 2005 a new chapter described as chapter XII H was inserted in the Income-tax Act, 1961, w.e.f. l.4.2006 containing sections no. as 115W - 115WL. This led to imposition of an independent but additional income tax @ 30% on fringe benefits provided by the employer to employees and on some deemed fringe, even if any employee has not availed any benefit. These provisions have seen several amendments in short period of time.

The scope of FBT should be restricted if truly applied to group benefits but it cancover many such expenses which benefits employees personal, can be taxed in their hands but are not assessed or are difficult to assessas income from salaries by way of remuneration or perquisites. In fact the concept underlying to tax collective benefit was diluted right from beginning by treating many direct individual based benefits like privilege, service, facility or amenity provided to employee directly, free or concessional tickets ,contribution to Superannuation Fund, Sweat Equity (ESOP), motor cars and phones provided to any particular employee or small group of employees etc.

Therefore it can be said that the FBT is not income-tax on income of person who is asked to pay it that is employer, but it is on income of other person or group of persons. There are many items covered by fringe benefit but they are can be considered as income or benefit of persons deriving the same in individual capacity.

Taxing a person who has not earned income:

Fringe benefit is really deeming income of another persons (employees) as income of first person (employer) and imposing a tax in nature of income tax. Therefore, this being not a tax on income of such person, rather it is a tax on part of allowable business expenses therefore, it is not valid levy, it is invalid and unconstitutional because tax on A (employer)cannot be imposed for benefits, if any derived by his employees.

Administrative burden:

The employers are also burdened with required to pay tax on quarterly basis and to file a separate return of Income-tax on fringe benefits within due date in prescribed applicable forms. Then there are procedures for assessment, rectification, revision, reassessment, appeals etc. This causes lot of administrative burden on employer who is in fact asked to pay tax on income of employees.

Basis of charge

As per Section 115WA fringe benefits provided or deemed to be provided by employer to employees during the previous year shall be taxable @ 30% on the value of such fringe benefits and the levy commenced from 1.4.06 i.e. assessment year 2006-07. Thus we find that four relevant previous years have lapsed and fifth year is running. It is surprising that so far there appears no judgment on validity or otherwise of the new levy.

The benefits can and should be taxed in hands of employees

For the purpose of carrying business or profession and to keep working team in the organization a business has to provide facilities to employees. For example in a large industrial unit employing thousands of persons the employer may have to provide facility for hospital, medical, schools etc. All these are covered by employees welfare nature and all employees can avail such facilities therefore and such expenses are wholly and exclusively incurred for the purpose of business. Similar is case of other expenses incurred by employer and covered by FBT- all such expenses are allowable as revenue expenses.

In case of taxation under head salaries a concessional treatment was / is given for such benefits derived by employees and that is only because of legislative intent. For example in case of house rent for accommodation provided to employee a major part of rent paid may not be taxable in hands of employee but still full rent paid by the employer is allowable as an expenditure. Contribution of employer to Superannuation fund (SF) may not be taxable in hands of employee but a FBT is levied.

Similarly, perquisites by way of motor car, leave travel allowance, medical reimbursements etc. may not fully taxable in the hands of employees though full amount of expenses incurred by the employer are allowable. And this is based on very old system of taxation on perquisites availed by employee. Some of benefits given to employees may be of the nature of capital receipt for example scholarship to the children of employees will be capital receipt in hands of employee / his children. But those incurred for the purpose of employees welfare and human resource development (HRD) and therefore the expenses are fully allowable in the hands of employer.

Additional income tax:

Even if there is no tax payable by the employer because of exemptions, deductions or losses still the employer isrequired to pay tax on fringe benefit as an additional income tax vide Section 115WA. This clarify that FBT is a tax imposed on income of some other persons on the employer.

How business expenditure can be considered as income of employer:

Once any expenditure is considered as business expenditure how a part of it can be considered as income liable to additional income tax? This question is very important to examine validity of FBT.

Another question is whether income of employees can be taxed in hands of employer by way of additional tax? If so why only a part of fringe benefits, why not entire salary and wages bill be taxed in hands of employers and employees can be allowed totally tax free salary income.

No basic exemption

There is no basic exemption provided for employer. Therefore suppose a shopkeeper , run by a firm, has employee done sales person, and two laborers / helper to whom he provides tea and biscuits costing Rs. 50 per day for 300 days in a year thus is fringe benefit will be Rs.15000 and the employer will be required to pay tax and to file return. It is desirable that a basic exemption by way of number of employees or by way of a limit on salary and wage payment may be provided.

A simple way of collecting tax:

If additional income tax can validly be levied on employers in respect of fringe benefits availed by employees, then naturally employers can be taxed on the income of employees. A study can be made as average tax payable by employees on salary and wages earned by them and value of fringe benefits on which FBT is collected. Then a simple rate of additional income tax of say 5-7% of entire salary, wages and perquisites can be imposed on employers and all employees can be exempted from paying income tax. This will make easy collection of tax, do away with formalities relating to TDS, do away with a large number of tax assesses. We can learn from the experience of tax on distribution of dividend by companies and Mutual Funds and allowing exemption to share/ unit holders instead of TDS on dividends- claims for refund, assessment etc. which took lot of time of assesses and authorities earlier.