Chinmay Khandelwal
Taxation of employee benefits has always been a complex issue in income tax law. Traditionally, any perquisite or benefit received by an employee from his employer was taxable in the hands of the employee under Section 17(2) of the Income-tax Act, 1961. However, in practice, many benefits provided by employers were collective in nature or were enjoyed by employees indirectly, making it difficult to attribute and tax them individually.
To address this difficulty, the Government of India, through the Finance Act, 2005, introduced a new levy called the Fringe Benefit Tax (FBT). This tax was incorporated into the Income-tax Act under Chapter XII-H (Sections 115W to 115WL).
FBT shifted the liability of taxation from employees to the employer, making the employer responsible for paying tax on certain specified benefits provided to employees. This was based on the rationale that the employer is in a better position to identify and quantify such benefits than individual employees.
Although the intention was to simplify taxation and plug revenue leakages, FBT soon became highly controversial. Businesses argued that it taxed genuine business expenditure like marketing or client hospitality, which were not strictly employee benefits. The compliance burden was heavy, as employers had to maintain detailed expense records and classify them under FBT categories.
Due to strong criticism, administrative difficulties, and widespread litigation, the Government decided to abolish FBT through the Finance Act, 2009. After abolition, the taxation of perquisites reverted to being in the hands of the employees under Section 17(2).
What is Fringe Benefit Tax?
In simple language Fringe Benefit Tax was a tax paid by the employer on certain benefits and perquisites provided to employees, whether directly or indirectly, as defined under Sections 115WA to 115WL of the Income-tax Act.
Fringe Benefit Tax (FBT) was introduced by the Finance Act, 2005 and governed by Chapter XII-H (Sections 115W to 115WL) of the Income-tax Act, 1961.
♦ Statutory Definition (Section 115WB):
According to Section 115WB(1), “fringe benefits” means any consideration for employment provided by an employer to his employees by way of:
1. Any privilege, service, facility, or amenity, directly or indirectly, provided by the employer,
2. Any reimbursement of expenses incurred for employees,
3. Any free or concessional tickets, vouchers, or similar items, and
4. Any prescribed benefits.
Further, Section 115WB(2) provided a list of deemed fringe benefits, including:
- Entertainment expenses
- Hospitality expenses
- Conference expenditure
- Sales promotion and publicity
- Employees’ welfare expenditure
- Conveyance, travel, and hotel expenses
- Festival celebrations and gifts
- Club memberships
- Employee Stock Option Plans
♦ Chargeability (Section 115WA):
FBT was levied on the employer, not the employee. It applied to companies, firms, AOPs, BOIs, local authorities, and every other employer except sole individuals (unless employing).
♦ Valuation (Section 115WC):
The value of fringe benefits was a fixed percentage of the expenditure incurred under specified heads. For example:
- 20% of entertainment expenses
- 50% of festival celebrations
- 20% of sales promotion expenses, etc.
Tax was then levied on this computed value at the prescribed rates.
Why was FBT in Controversies?
Although the Fringe Benefit Tax (FBT) was introduced in 2005 with the stated objective of simplifying taxation of employee benefits, in practice it created confusion, compliance burdens, and disputes. Both employers and tax experts criticized it heavily. The controversy around FBT can be understood under the following heads:
1. Overlap with Business Expenditure
- Many expenses covered under FBT, such as sales promotion, brand building, dealer conferences, and hospitality, were genuine business expenditures.
- For example, if a company spent money on advertising or dealer meetings to boost sales, such expenses were treated as fringe benefits—even though employees were not the primary beneficiaries.
- This blurred the line between employee perks and business promotion costs, leading to disputes.
2. Tax on Non-Employee Benefits
- FBT was supposed to tax benefits given to employees, but it also covered dealers, distributors, and business associates.
- For instance, in Bajaj Auto Ltd. v. Addl. CIT, expenses on dealer training programmes were taxed under FBT.
- This went beyond the original intention of the law, making businesses feel unfairly burdened.
3. Compliance Burden
- Employers had to segregate, track, and report various expenses under multiple heads.
- Even small gifts, club memberships, or travel reimbursements had to be classified.
- For large corporations, this meant extensive record-keeping, audits, and higher compliance cost
Due to these controversies, FBT became one of the most criticized taxes in India’s modern tax history. The Government finally abolished it through the Finance Act, 2009, acknowledging that the levy was complex, unfair, and litigation-prone.
LAANDMARK CASES
1. Tata Consultancy Services Ltd. v. Addl. CIT (2011) 140 TTJ 649 (ITAT Mumbai)
- Facts:
The Revenue sought to levy Fringe Benefit Tax (FBT) on Employee Stock Option Plans (ESOPs) provided by TCS to its employees. - Issue:
Were ESOPs taxable as fringe benefits before 1 April 2007? - Ruling:
The ITAT held that ESOPs were not covered under FBT before the amendment made by the Finance Act, 2007, which specifically included them under Section 115WB(1)(d).
2. CIT v. Wipro Ltd. (2010) 325 ITR 119 (Karnataka High Court)
- Facts:
Wipro incurred foreign travel expenses for its employees, claiming these were purely for business purposes and should not attract FBT. - Issue:
Are foreign travel expenses, even if for business purposes, liable to FBT? - Ruling:
The Karnataka High Court held that once expenses fall under Section 115WB(2) (e.g., travel, hotel, conveyance), they are automatically subject to FBT, regardless of business necessity.
Conclusion
The introduction of Fringe Benefit Tax (FBT) in 2005 marked an ambitious attempt by the Indian government to plug tax leakages and ensure that employee benefits, which were often enjoyed collectively or indirectly, did not escape taxation. By shifting the liability from employees to employers, the government believed it had created a more efficient system of collection.
However, in practice, FBT became one of the most debated and unpopular tax measures in recent history. Its wide scope brought genuine business expenses like marketing, travel, dealer conferences, and brand promotions into the tax net, far beyond the narrow idea of employee perks. The rigid valuation rules, compliance burden, and absence of exemptions for business necessity turned it into a litigation-heavy and burdensome levy.
While the government eventually abolished FBT in 2009, its short-lived existence left behind valuable lessons. It highlighted the risks of over-expansion in tax design, the importance of clarity in distinguishing between business expenses and employee benefits, and the need for simplicity in compliance.
For tax professionals, students, and policymakers, FBT continues to remain relevant. The judicial rulings delivered during its tenure still guide the interpretation of terms like “benefits” and “perquisites” under the Income-tax Act. It serves as a reminder that any taxation system must strike the right balance between administrative convenience and fairness to taxpayers.
In essence, FBT may be gone, but its legacy ensures that it will always remain a significant chapter in India’s taxation history — one that shaped the modern understanding of employee compensation and perquisite taxation.
