Indian System of Fringe Benefits Tax

A recent controversial move by the Indian income tax authorities was the introduction of a fringe benefits tax (FBT) in 2005. Its introduction has been justified on the grounds that it taxes fringe benefits which are collectively enjoyed by employees and are in the form of facilities and amenities that are difficult to identify, segregate and apportion and tax among beneficiaries. Accordingly, the tax liability has been fixed on employers and not on employees. FBT collection data for the first two years have been analysed to gain deeper insight into reforming and fine-tuning the FBT regime. It has been found that banking and insurance, infotech and petrochemicals are some important sectors of the economy that contribute significantly to FBT collection. Further, out of the expense heads specified as the base of FBT, it was found that ‘employee welfare’, ‘conveyance’, ‘telephones’ and ‘maintenance of cars’ are most important in terms of collection. Evidence from statistical tests shows that the proportion of FBT collection from different heads has remained constant over the two years of its operation, even at the level of economy sectors. Other tests show that there are significant interaction effects between FBT heads and economy sectors. However, statistical evidence shows that sample data are not homogeneous, which points towards arbitrary booking of expenses under different heads, possibly to avoid the FBT.