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All about the new fringe benefit tax
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August 30, 2005

The Central Board of Direct Taxes has issued a circular clarifying some issues about Fringe Benefit Tax.

The CBDT says that FBT will have to be paid by the employers in advance during the financial year on a quarterly basis.

Employees Stock Options (ESOPs) have been exempt from the new FBT, but not car and health perks, leave travel concessions and several other benefits, including amusement, games and sports.

Here is the text of the circular:

The Finance Act, 2005 has introduced a new levy, namely, Fringe Benefit Tax (hereafter referred to as FBT) on the value of certain fringe benefits. The provisions relating to levy of this tax are contained in Chapter XII-H (sections 115W to 115WL) of the Income-tax Act, 1961.

This circular seeks to provide a harmonious, purposive and contextual interpretation of the provisions of the Finance Act, 2005 relating to the FBT so as to further the objective of this levy.


The taxation of perquisites or fringe benefits is justified both on grounds of equity and economic efficiency. When fringe benefits are under-taxed, it violates both horizontal and vertical equity.

A taxpayer receiving his entire income in cash bears a higher tax burden in comparison to another taxpayer who receives his income partly in cash and partly in kind, thereby violating horizontal equity. Further, fringe benefits are generally provided to senior executives in the organization.

Therefore, under-taxation of fringe benefits also violates vertical equity. It also discriminates between companies which can provide fringe benefits and those which cannot thereby adversely affecting market structure. However, the taxation of fringe benefits raises some problems primarily because:

In India, prior to assessment year 1998-99, some perquisites/fringe benefits were included in salary in terms of section 17 and accordingly taxed under section 15 of the Income-tax Act in the hands of the employee and a large number of fringe benefits were taxed by the employer-based disallowance method where the quantum of the disallowance was estimated on a presumptive basis.

In practice, taxation of fringe benefits by the employer-based disallowance method resulted in large-scale litigation on account of ambiguity in defining the tax base. Therefore, the taxation of fringe benefits by the employer-based disallowance method was withdrawn by the Finance Act 1997.

However, the withdrawal of the provisions relating to taxation of fringe benefits by the employer-based disallowance method resulted in significant erosion of the tax base. The Finance Act, 2005 has introduced a new levy, namely, the FBT as a surrogate tax on employer, with the objective of resolving the problems enumerated in para 2.1 above, expanding the tax base and maintaining equity between employers.

What is liable to FBT?

The tax base for the purposes of FBT is the value of fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year. The determination of the tax base comprises three elements:

It is based on a presumptive method applied to certain heads of expenditure as a measure/indicator of fringe benefits.

The scope of the term fringe benefits provided' is defined in sub-section (1) of section 115WB to mean any consideration for employment provided by way of

As pointed out in para 2.1, many perquisites are disguised as reimbursements or other miscellaneous expenses so as to enable employees to escape/reduce tax on their real income.

There are two alternate methods to identify such disguised payments to employees: the presumptive method and the discretionary method. Under the presumptive method, the FBT base can be estimated on a presumptive basis by using certain indicators like sales, number of employees, number of cars, number of houses, certain items of expenses, etc.

Such a method has the virtue of simplicity, minimum disputes, low compliance cost, and less administrative burden. Accordingly, the scope of the term 'fringe benefits deemed to have been provided' is defined in sub -section (2) of section 115WB so as to provide that fringe benefits shall be deemed to have been provided by the employer if he has incurred any expense on, or made payment for, the purposes summarized below:

The method of computation of the value of 'fringe benefits provided or deemed to have been provided' for purposes of levy of the FBT is provided for in sub-section (1) of section 115 WC. In terms of the said provision, the value of the fringe benefits provided or deemed to have been provided shall be the aggregate of:

(a) Cost of free or concessional ticket for private journeys of the employees or their family members as provided by the employer to the general public as reduced by the amount, if any, paid by, or recovered from, his employee or employees;

(b) The actual amount of contribution made by the employer to an approved superannuation fund for the employees; and

(c) A specified percentage of each of the expenses enumerated as items (A) to (P) in the earlier paragraph. In case of the items (A) to (K), the specified percentage is 20% and for items (L) to (P) it is 50% of the expenses referred to therein, subject to the following exceptions,-

Further, sub-section (3) of section 115WB provides that the privilege, service, facility or amenity referred to in sub-section (1) of the said section does not include perquisites in respect of which tax is paid or payable by the employee.

Who is liable to pay the tax?

4.1 The FBT is payable by an employer who is,-

The tax on fringe benefits is payable by the employer even if he is not liable to pay income tax on his total income computed in accordance with the provisions of the Income tax Act other than the provisions of Chapter-XIIH.

Tax Rate

FBT shall be payable at the rate of 30% of the value of fringe benefits computed in the manner provided in section 115WC.

Payment of FBT

The FBT is to be paid in advance during any financial year in respect of the current fringe benefits which would be chargeable to tax in the assessment year following that financial year.

The employer is required to pay advance tax at the rate of 30% of the current fringe benefits paid or payable in each quarter. The advance tax is to be paid on or before the 15th of the month following that quarter. However, in the case of the last quarter ending on the 31st of March of the financial year, the advance tax shall be payable on or before the 15th day of March of that year.

The advance tax for the first three quarters is to be paid on the basis of actual expenditure incurred in each quarter. However, the last installment of the advance tax may be paid on an estimate basis, as the same has to be paid before the closure of the financial year.

Failure to pay advance tax for any quarter, or payment less than 30% of the value of fringe benefits in that quarter, will attract interest at the rate of 1% on the shortfall, for each month or part of the month for which such shortfall continues.

Return of fringe benefits

An employer who has paid or made provision for payment of fringe benefits to his employees during the previous year is required to furnish a return of fringe benefits in the prescribed form and manner to the Assessing Officer before the due date.

In the case of a company or an employer other than a company whose accounts are required to be audited, the due date is the 31st of October of the assessment year. In the case of any other employer, the due date for filing the return of fringe benefits is the 31st of July of the assessment year.

After the due date, the Assessing officer may issue a notice to the assessee requiring him to furnish a return in the prescribed form and manner within a period of thirty days.

Failure to furnish a return of fringe benefits or delayed filing of such return will result in the levy of interest at the rate of 1% for each month of delay or till the assessment is made, on the amount of tax on the value of fringe benefits.


The Assessing Officer is required to make an assessment of the return of fringe benefits furnished by the employer under section 115 WE and determine the tax or interest payable by him or refund due to him.

The procedure for assessment under this section is similar to the corresponding provisions for assessment of a return of income under section 143 of the Act.

Where the employer fails to furnish a return of fringe benefits or fails to comply with the terms of a notice issued under section 115WE(2), the Assessing Officer is required to make the assessment to the best of his judgement, after giving the assessee a reasonable opportunity of being heard.

The provisions of section 115WF correspond to the provisions of section 144 in relation to assessment of a return of income.

Where the Assessing Officer has reason to believe that any fringe benefits chargeable to tax have escaped assessment for any assessment year, section 115WG provides for the reassessment of such fringe benefits which have escaped assessment.

This provision corresponds to section 147 of the Act in relation to Income escaping assessment.

Section 115WH requires the Assessing Officer to serve a notice on the assessee before making an assessment or reassessment under section 115WG requiring the assessee to file a return in the prescribed form and manner. The notice can be issued after the Assessing Officer records his reasons in writing for doing so.

However, no notice can be issued for an assessment year beyond six years from the relevant assessment year. Further, in a case where the assessment has been completed under sub-section (3) of section 115WE or section 115WG for the relevant assessment year, the Assessing Officer cannot issue a notice for reopening the assessment after the expiry of four years, without the approval of the Chief Commissioner or the Commissioner.

Application of other provisions of the Act

All other provisions of the Act relating to income-tax authorities, appeal, collection and recovery of taxes, penalties, prosecution, etc, shall apply to fringe benefits also, unless otherwise provided in Chapter XII-H.

Treatment of FBT

The FBT shall not be allowed as a deduction in computing the income chargeable under the head 'profits and gains of business or profession.'

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