The rationale of FBT as explained by the Finance Minister P. Chidambaram in his Budget speech (Budget 2005-06) is given below :
“I have looked into the present system of taxing perquisites and 1 have found that many perquisites are disguised as fringe benefits, and escape tax At present, where the benefits are fully attributable to the employee, they are taxed in the hands of employee; that position will continue. In addition, 1 now propose that where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees, thay shall be taxed in the hands of the employer.”
Thus, the main objective of FBT is to tax, in the hands of employer, the benefits usually enjoyed collectively by the employees and which cannot be attributed to individual employees. It is so because many corporate employers and other big employers incure high expenditure on providing fringe benefits to their employees. It helps these big employers to attract and retain talented employees in the organisation because such fringe benefits keep the morale of employees high. The enjoyment of fringe benefits infuses among employees a sense of belongingness and loyalty to the organisation in which they work in. Fringe benefits are becoming an important component of remuneration packages being offered by all most all the big organisations.
In order to explain the provisions of FBT in detail and to clear the doubts regarding FBT, the CBDT later issued a circular No. 8/2005. The justification of FBT as explained in the circular is given below
“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 tax-payer 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 organisation. Therefore, under taxation of fringe benefits also violate vertical equity. It also discriminates between companies which can provide fringe benefits and those which cannot thereby adversely affecting market structure