Fringe benefits tax is defined as "any consideration for employment offered by the employer in the form of any fringe benefits privilege, service, facility, or amenity supplied to employees."
Starting with the assessment year 2006-07, an employer must pay the fringe benefits tax and the income tax due for each assessment year. An employer must pay the fringe benefits tax offered or deemed to have been provided to his employees. Even if an employer is not required to pay income tax, the obligation to pay fringe benefits tax exists. As a result, regardless of whether an employee's revenue is exempt under the Income Tax Act, all those who fall within the definition of the employer are compelled to pay tax for the fringe benefits supplied to employees.
Did you know?
Worker novation agreements are becoming more common, and many believe this arrangement exempts them from paying fringe benefits tax. Fringe benefits tax (FBT) may still apply depending on the agreement's structure. Keep track of all expenses that you paid outside of the novation agreement.
What Is a Fringe Benefits Tax?
Fringe benefits are benefits provided to employees and their declared compensation for performing a certain service. Some benefits, including financial services and health insurance, are mandated by law, while others are offered by the employer voluntarily.
Fringe benefits examples are free breakfast and lunch, gym membership, employee stock options, transportation benefits, retirement planning services, childcare, and education help are all examples of optional fringe benefits. One of the perks of fringe benefits is that they are tax-free for the employer if certain criteria are met. On the other hand, fringe benefits beneficiaries must include a reasonable amount in their annual taxable income. The employer provides fringe benefits tax in most cases, even if the actual source is a third party. This is because the employer is the one who pays for the employee's benefit. Similarly, even if the benefit extends to other family members, the employee is usually the one who receives it.
Because the employer can pick which benefits to provide to their employees during a given period, the numerous fringe benefits provided to employees vary from one firm to the next. During the hiring process, employees are given the option of selecting the fringe benefits they are interested in.
Employees are free to choose the alternatives that provide the most comfort in their current position in the organisation, whether a company car, an employer-paid gym membership or college financial support. Retail firms may offer employee discounts, gifts, and no-cost services to their employees.
Types of Fringe Benefits Tax
There are two types of fringe benefits available. Some benefits are mandated by law, while others are given at the employer's discretion.
Legally Mandated Fringe Benefits
The mandated fringe benefits tax is designed to cover medical expenses, protect employees from financial troubles if they lose their jobs, and provide them with retirement income to help them live comfortably. Some of the mandatory fringe perks that employers must provide are as follows:
- Healthcare coverage
The Patient Protection and Affordable Care Act includes this ancillary benefit. Businesses with more than 50 workers must provide healthcare programmes, and employees must have health insurance coverage. Primary care physicians, specialists, and emergency treatment are all covered under the health care plans.
- Unemployment benefits
The Federal Insurance Contributions Law mandates employers to pay a federal and state unemployment tax to the Department of Labour, which provides salaries, training, and career assistance to employees laid off for no reason. These fringe benefits are intended to give temporary financial support to unemployed persons who meet the act's standards.
- Leave of absence for medical reasons.
Businesses with more than 50 workers must give family and medical leave to employees who have worked for the firm for more than a year. Medical leave is unpaid, but it is protected, and it can continue for up to a year.
- Compensation for employees
The Department of Labour administers the worker's compensation fringe benefits tax to federal employees injured on the job or developing an occupational illness. Employees offer medical care, pay replacement, rehabilitation, and other fringe benefits. Compensation standards differ by state, so injured workers should contact their state's workers' compensation board for further information.
- Old age and retirement benefits
Deferred income plans, pensions, gratuities, provident funds, old-age assistance, old age counselling, medical benefits for retired workers, travelling concessions for retired employees, jobs for sons/daughters of dead employees, and others fall under this category.
The number of fringe benefits taxes has grown dramatically over the years, and expenditures on such programmes have often equalled or exceeded the employees' base pay remuneration. As a result, the word "fringe" is no longer considered suitable and has been replaced by terminology like "employee perks" and "employee services."
Fringe Benefits Tax Rate
When the government changed the Indian tax rules in April 2005, any advantages that were previously enjoyed collectively by employees but could not be ascribed to individuals were now taxed as a fringe benefits tax in the hands of the employer (FBT). The appropriate rate was 30% plus a ten per cent surcharge, resulting in a total of 33% of a stated base.
Contributions to superannuation funds are taxed.
The advantages that were taxed as a fringe benefit were:
- any benefit, service, facility, or amenity offered to workers (including former employees) directly or indirectly by an employer, whether by reimbursement or otherwise;
- any free or discounted tickets supplied by a company for workers' or their family members' travel;
- Any employer contributions to an authorised superannuation fund for employees. Contributions made by an employer to an authorised superannuation fund for the benefit of workers were formerly excluded from Indian income tax up to a maximum of 15% of the employee's salary each year.
Fringe Benefits Tax Exemptions
FBT does not apply to a variety of benefits. Although they are commonly called "exempt fringe benefits," the FBT statute refers to them as "exempt benefits." The list of benefits that are exempt from fringe benefits is as follows:
- Amounts paid by a firm to a professional to advertise the company and the goods/services they sell are exempt from taxation.
- An employer bears expenses for providing transportation to and from the office.
- If an employer made a contribution to a superannuation fund for an employee, the amount contributed was tax-free up to ₹ 1 lakh per employee.
- Expenses incurred as a result of attending job interviews and selection exams;
- Taxi-travel – taxi travel offered to workers is an exempt benefit if the taxi begins or finishes at the employee's workplace and is a single trip – taxi travel provided to ill employees is likewise exempt, regardless of whether the employee is transferred to a doctor, relative, or their home;
- Recreational and kid facilities — these exclusions apply only if the facilities are offered on the university's commercial premises for the benefit of workers;
- Newspapers and magazines used for university business; the exemption does not apply if the commercial usage is only incidental;
- Work-related medical tests (including pre-employment tests), work-related medical screening, work-related preventive health care (including certain vaccinations), work-related counselling (including services to former employees who were laid off), and migrant language training are all examples of occupational health and counselling.
Today’s Tax on Fringe Benefits
- By the time the next budget is presented, the much-despised fringe benefits tax (FBT) is expected to have undergone considerable revisions.
- With business groups like the Confederation of Indian Industry and Assocham advocating a corporation tax rise for companies who refuse to pay fringe benefits tax, it's safe to say that the tax will not survive in its current form by the time the next budget is presented.
- While the CII is mulling a 1% rise in corporate income tax, Assocham has proposed a 2 per cent increase in income tax by eliminating FBT.
- MS Darda, the head of the Central Board of Direct Taxes, said that the FBT was causing distress to businesses and tax officers. "The FBT is quickly becoming a trauma, first for the taxpayer, and will soon become so for tax authorities," he added, acknowledging that the identification of fringe benefits was complicated.
- Darda said the government would "at the absolute least" endeavour to make the FBT payment procedure as easy as possible in response to industry complaints that the tax had caused numerous administrative issues. Darda stated that the government was in the process of determining whether specific company expenses would be subject to fringe benefits tax.
Many economists and tax professionals believe that some type of fringe benefits tax would be beneficial. Both efficiency and equity, they feel, would be enhanced. Large sums of money might be generated, which could fund additional government expenditure, cut other taxes, or reduce the government's deficit. However, public resistance is strong, and there is little sign that anyone will implement any reform soon. Tax preferences for fringe benefits may increase economic efficiency if private markets fail to provide enough fringe benefits due to market failures.
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