FRINGE BENEFIT TAX ON EMPLOYERS SEEMS ULTRA VIRSE THE CONSTITUTION OF INDIA – BECAUE TAX ON INCOME CAN BE LEVIED ON PERSON WHO HAS EARNED INCOME AND NOT WHO PAID INCOME TO OTHERS OR INCURRED EXPENESES FOR FRINGE BENEFITS.

[CA DEV KUMAR KOTHARI]

FRINGE BENEFIT TAX ON EMPLOYERS SEEMS ULTRA VIRSE THE CONSTITUTION OF INDIA – BECAUE TAX ON INCOME CAN BE LEVIED ON PERSON WHO HAS EARNED INCOME AND NOT WHO PAID INCOME TO OTHERS OR INCURRED EXPENESES FOR FRINGE BENEFITS.

FRINGE BENEFIT TAX (FBT):

FBT had a short duration of its applicability for four years only from AY 2006-07 to 2009-10.

There has been considerable litigation on various aspects of FBT. The reported judgments so far are in relation to applicability of FBT to various items of expenses and manner of computation. So far there is no reported judgment on constitutional validity of the levy of tax on employers who bore the burden of expenses in providing fringe benefits and were taxed in relation to income of employees by way of fringe benefits availed and enjoyed by employees many benefits in collective manner and many individually by concerned employee.

Petitions to challenge constitutional validity:

In the book “Sampath Iyengar’s Law of Income-tax” 11th edition at page no. 8586-87 we find the following observations:

“There are other objections to this levy, so that many High Courts have admitted the challenge to the validity of this levy. The Writ Petitions are likely to be transferred to the Supreme Court”.

In view of the above fact of pending Writ Petitions, author felt it desirable to write on the question, whether the levy can be called a levy of tax or impost on income, as permitted under the Constitution of India? And to put his views on the same for consideration of readers for arguing when matter come-up for hearing.

Charging provision of FBT the charging section 115WA is reproduced below with highlights added for analysis:

Charge of fringe benefit tax.

115WA.(1) In addition to the income-tax charged under this Act, there shall be charged for every assessment year commencing on or after the 1st day of April, 2006, additional income-tax (in this Act referred to as fringe benefit tax) in respect of the fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year at the rate of thirty per cent on the value of such fringe benefits.

(2) Notwithstanding that no income-tax is payable by an employer on his total income computed in accordance with the provisions of this Act, the tax on fringe benefits shall be payable by such employer.

From the above charging section it is clear that:

Fringe benefits are provided by employer to his employees. So the employer has not earned any income by providing fringe benefits. Rather he has provided fringe benefits by incurring expenses so fringe benefits cannot be income in hands of the employer. If is not his income, how he can be called to pay a final tax (and not like TDS) on income of other persons.

The fringe benefit tax is in addition to income tax payable, if any, by employer on his total income. So even in case income of employer is not taxable, still FBT will be payable. Therefore, in case of an agriculturist, his agricultural income may not be taxable under IT Act, still value of fringe benefits provided to employees in the agricultural farm will be taxable. Similar will be cases in which income of employer may be exempt- fully or partly.

Nature of fringe benefits:

Fringe benefits or perquisites are provided by employer to employees as per terms and conditions of employment or as per trade practices. The employees get benefit from such fringe benefits or perquisites. The basic aim to impose tax on employer was to impose a tax on certain collective benefits extended by employers to employees and enjoyed by employees collectively because on such collective benefits it was not possible to impose tax on employees.

However, we can find that even some benefits made available to employees independently and directly were included in scope of fringe and tax was levied on such items for example contribution to Superannuation Fund, sweat equity, conference, specific hospitality, telephones or electricity provided at residence , motor car provided to employees individually, free or concessional ticket provided to any employee, gifts to particular employee or scholarship to children of specific employee, In such cases the benefit is directly identifiable for employee getting the benefit, There is no collective benefit to employees at large or in a group. All such incomes can be directly included in hands of concerned employee. So there is no question of considering them fringe benefits which cannot be taxed in hands of employees.

We also find some items deemed to be fringe benefits, although any employee might not have availed or got any benefit from such expenses. For example, sales promotion and publicity, advertisement expenses, payment made to a brand ambassador, free distribution of samples to customers or doctors or teachers etc. In such cases there is hardly any fringe benefit to employee. How it can be regarded as income of employer or employee. So there is no question of considering them fringe benefits which cannot be taxed in hands of employees.

Fringe benefits are benefit, gain or perquisite of employees:

Fringe benefits are benefit, gain or perquisite of employees. By availing fringe benefits, employees save their expenses and costs. If a profit and loss account or income and expenditure account be prepared for employees, the benefits availed from employer will be on the credit side, and if the fringe benefit resulted into a personal expenses, it will be added to drawings or reduced from capital. In case a fringe benefit brings an asset or durable saving of employee it will find place in balance sheet. So fringe benefits can at best be considered as income of employees and cannot by any stretch of imagination be called income of employer.

The provision of fringe benefits entails expenditure of employer:

Providing various benefits which are covered by fringe benefits really entails costs and expenses on account of employer. The expenses on account of fringe benefits provided to employees find a place in list of expenses and thus debited to the P & L account. They cannot be any starch of imagination be credited to the P & L account of employer.

Tax on income can be imposed on person who earned income:

The Constitution on India permits the central Government to levy tax on income other than agricultural income.

Fringe benefits provided to employees cannot be brought within the expression of income of employer. Therefore, tax on fringe benefits provided by employer to his employees cannot be called a tax on income of employer.

Under Income-tax Act, 1961 also tax can be imposed on ‘total income’ or on income. An item which cannot be called income of a person, cannot be tax as income of such person.

A neighbor cannot be taxed for income of another neighbor:

Income tax on income of A can be imposed on A only and not in hands of his neighbor say B. Similarly income of B cannot be taxed in hand of A.

“Tax on income” means income of person who earned it.

Till AY 1992-93 even income of minor child was assessed separately in his hands. Even after amendment, some income which are earned by minor child by his skills are assessed in his hands and not in hands of parent.

Income of wife is assessed in her hands and not in hands of her husband.

Clubbing of income are based on certain presumptions rather say bias:

Exception to tax income of some other person are rare and are on ground of transfer of income from one person to spouse or child or some specified close relatives. In such cases, there is presumption that income is earned by one person on behalf of other person. For example, there is presumption that income of minor child is earned by efforts of parent and thus income of minor child is assessed in hand of one of parent whose income is higher. Similarly when an asset is transferred by spouse, then the income from transferred asset may be assessed in hands of transferor. These clubbing provisions are to put a check on certain practices which are unfortunately considered as tax avoidance.

In fact there should be encouragement of savings or capital build-up for spouse and children so that they are stronger and not dependent on society. However, our government adopt short term policies and do not encourage genuine capital build-up for dependents.

It is worth to mention that even in case of minor child, income earned by him by application of his skills is not clubbed in hands of parent and is assessed separately as income of minor child.

In provision of fringe benefits there is no tax avoidance:

Employer employ or engages employees for doing various work required for the purpose of his activities of trade, industry , service or commerce etc. Fringe benefits are provided as per terms and conditions of employment and also trade practices. For retention of employees and to avoid frequent changes, perquisites or benefits are extended to employees as an incentive and also as a check on their transferability. These are commercial considerations. The result of such benefits are expected by way of higher productivity and efficiency, loyalty of employees, good relations, reputation of organization etc. All these commercial aspects are likely to make business of employer more profitable and sustainable in long run. Thus these will be beneficial for the economy as a whole and also for better tax collection in long term.

Therefore, there is no question of any sort of tax avoidance by way of transferring income from employer to employees. Therefore any sort of clubbing provisions to curb tax avoidance cannot be applied to tax employer by way of FBT.  

Employees can be taxed:

It is not a case that it is very difficult to impose a tax on employees on the fringe benefits availed by them. Earlier to regime of FBT and even after regime of FBT tax on perquisites is imposed on employees. Even when tax was imposed on employer by way of FBT, some estimates were applied. So while taxing in hands of employees also some estimates can be applied. Therefore, FBT as a tax on income in hands of employer, who in fact incurs expenses on fringe benefit cannot be called constitutionally valid even on ground of removal of administrative constraints.

The employer computes taxable income of employees, he includes value of perquisites in income of employees, thus even collective fringe benefits can be estimated in hands of employees and tax can be imposed.

In view of above discussion, it can be said that levy of FBT in hands of employer is not a valid levy by way of a tax or impost on income within the meaning of tax on income as per the COI and even on any other incidental objectives or ground like administrative difficulties, or with a view to put a check on tax avoidance.

Therefore, taxing employer in relation to fringe benefits provided by employer to employees cannot be called a valid levy of tax for any reason and on any ground.

Provisions of the Constitution of India:

The Central Government or UOI is authorized to levy tax on income and corporation tax the relevant entries are as follows:

List I - Union List

82. Taxes on income other than agricultural income

85. Corporation tax.

Definitions in COI:

The meaning of ‘agricultural income’ and other related words are found in the Article 366 of the COI. Related definitions are reproduced below:

Article 366 in The Constitution Of India 1949

366. Definition In this Constitution, unless the context otherwise requires, the following expressions have, the meanings hereby respectively assigned to them, that is to say

(1) agricultural income means agricultural income as defined for the purposes of the enactments relating to Indian income tax;

(6) “corporation tax” means any tax on income, so far as that tax is payable by companies and is a tax in the case of which the following conditions are fulfilled:—

(a)    that it is not chargeable in respect of agricultural income;

(b) that no deduction in respect of the tax paid by companies is, by any enactments which may apply to the tax, authorised to be made from dividends payable by the companies to individuals;

(c) that no provision exists for taking the tax so paid into account in computing for the purposes of Indian income-tax the total income of individuals receiving such dividends, or in computing the Indian income-tax payable by, or refundable to, such individuals;

(28) taxation includes the imposition of any tax or impost, whether general or local or special, and tax shall be construed accordingly;

(29) tax on income includes a tax in the nature of an excess profits tax;

The Central Government or the UOI is empowered to levy tax on income other than agricultural income.

Therefore, ‘tax’ in nature of tax on income can be either a tax or an impost on the following type of incomes which the Central Government can impose:

1. tax or impost on ‘income’ ,
2. tax or impost on ‘excess profits’ ,
3. tax or impost on income of companies as ‘corporations tax’ as defined in Article 366 (6).

Within the constitution we can find meaning and scope of ‘income’ as a part of profit. This is clear when we find that agricultural income is to be computed with reference to profit or gains from agricultural land by way of rent or cultivation of land, the inclusive definition of tax on income includes a tax in the nature of an excess profit tax. This also indicates that income will be either profit or a part of profit and it cannot be anything other than a profit.

As discussed earlier costs of fringe benefits provided by employer to employees is not even a receipt by employer it is payment or expenditure for the employer therefore any fringe benefits provided cannot be called income of employer.

Fringe benefits provided are neither profit nor ‘excess profits’ in case the employer is a company,

Therefore, fringe benefits provided by employer to employees is not income of employer as a company even in context of ‘corporation tax’

Therefore, levy of additional tax as per section 115 W is not within the authority or power provided in the Constitution of India and in considered view of the author the levy of additional tax u/s 115 W is ultravirse the COI and it can be challenged by way of Writ Petition in any High Court in India on the basis of above contentions.