UNIVERSITY OF MUMBAI

M.COM. PART - I (FIRST SEMESTER)

ACADEMIC YEAR 2012 - 2013

A PROJECT ON : FRINGE BENEFITS

PROJECT BY MR. PANCHAL HIREN SURESH ROLL NO. 47 DIVISION : B

PROJECT GUIDE PROF . HARIKRISHNAN KURUP

MITHIBAI COLLEGE OF ARTS, CHAUHAN INSTITUTE OF SCIENCE & AMRUTHBEN JIVANLAL COLLEGE OF COMMERCE & ECONOMICS. VILE PARLE (WEST) MUMBAI - 400 056

DECLARATION

I, MR. PANCHAL HIREN SURESH student of MITHIBAI COLLEGE, studying in M.COM (PART I) Roll No. 47, hereby declare that i have completed my project, titled Fringe Benefits for the subject - Human Resource Management in the academic year 2012 - 2013. The information submitted here is true and original as per my research and observation.

DATE OF SUBMISSION 28TH SEPTEMBER 2012. SIGNATURE OF STUDENT (MR. PANCHAL HIREN SURESH)

CERTIFICATE THIS IS TO CERTIFY THAT MR. PANCHAL HIREN SURESH, STUDENT OF M.COM PART I OF MITHIBAI COLLEGE, HAS COMPLETED THE PROJECT ON Fringe Benefits IN THE ACADEMIC YEAR 2012 - 2013. THE INFORMATION SUBMITTED IS TRUE AND ORIGINAL TO THE BEST OF OUR KNOWLEDGE.

SIGNATURE OF PRINCIPAL

SIGNATURE OF PROJECT GUIDE (PROF. HARIKRISHNAN KURUP)

COLLEGE SEAL

SIGNATURE OF EXTERNAL EXAMINER

ACKNOWLEDGEMENT

At this juncture, I would extend my gratitude to a number of people without whom this informative project would have been impossible. Every work that is appreciated is supported by various hands. This project would just not be complete without the valuable contribution from various people whom i have interacted with in the course of its completion. I would like to sincerely acknowledge my guide PROF. HARIKRISHNAN KURUP for providing me with an excellent and splendid opportunity to present this project on fringe benefits which definitely has given a further professional approach. I am extremely grateful to the University of Mumbai for having prescribed this project work to me as a part of the academic requirement in the MCOM -1course lastly, I would like to appreciate the management and staff of MITHIBAI College, MCOM-1 for providing the entire state of the art infrastructure and resources to enable the completion and enrichment of my project.

TABLE OF CONTENTS

Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Title Fringe Benefits Theoretical Background Features of Fringe Benefits Need For Fringe Benefits To Employees Types Of Fringe Benefits Fringe Benefits Provided By The Organization Merits & Demerits Of Fringe Benefits The Concept OF Fringe Benefits In The Organization Taxation Fringe Benefits FBT Abolished In India. Growth Of Fringe Benefits Beyond The Fringe Benefits Case Study Conclusion Bibliography

Page no. 7 10 12 13 14 15 20 22 23 26 27 28 31 35 37

FRINGE BENEFITS
Fringe benefits are compensations made to an employee beyond the regular benefit of being paid for their work. Some fringe benefits are fairly standard, such as offering a few days of sick time or paid vacation time. Others can be significantly greater, and more rare. Key executives in large companies might also enjoy fringe benefits like use of time-share condominiums, paid continuing education, use of a company jet, use of a company credit card, discounted or free health club memberships, and a significant amount of paid vacation. Most people who work full time in the US could probably not get along without fringe benefits. For example, offering health insurance to employees, where the employer pays part of the insurance is a typical example of fringe benefits. According to the laws in some states, companies of a certain size must offer health insurance with some sharing of payment at least to a full-time employee. Some companies avoid this by employing more part-time workers. Most companies, however, realize that fringe benefits like health insurance contribute to the well being of their employees. Whenever possible, they try to offer at least partially discounted insurance to an employee, even if they are not legally required to do so. Fringe benefits like sick or vacation time tend to be fairly standard as well, even if an employee does not work full time. These paid days off do tend to have a cap on them. For example, a new employee might get a weeks vacation time to start, and eight to ten days of sick time for year. Employees entering higher-level positions may be offered greater fringe benefits as incentive to join a company. In fact, in fields where there is a high demand for workers, such as nursing and teaching, some unusual fringe benefits may be offered to attract employees. Small school districts have gotten quite creative in this respect, since teacher salaries are still relatively low. A few unusual fringe benefits offered by school districts have been paid housing, or use of private lakes for fishing. More likely are paid incentives for joining a teaching staff such as hiring bonuses, offers to fund continuing education so teachers get higher degrees and thus higher pay, or offering mentor programs for new teachers.

Registered nurses are badly needed due to new requirements on nurse/patient ratio. This has led to uncommonly large hiring bonuses, agreements to pay off student loans for new nurses, and generous health insurance and time off packages. Other fields with high demands for workers and low worker supply are likely to offer the most attractive fringe benefits packages. Sometimes the fringe benefits turn out to be greatly needed. For example, the rising cost of private health insurance often makes obtaining a job with a good health plan highly desirable. Programs like 401ks can help employees save money for the future. Where job compensation is not commensurate with money needed to live comfortably, housing allowances, or company housing can often make the difference between being able to take a job and looking elsewhere. Some companies also pay fringe benefits for those who work night or swing shifts. These fringe benefits may be in the nature of a 1030% increase of base pay for working a non-standard shift. This is called a shift differential and is quite common in the medical field and in manufacturing. Definition of 'Fringe Benefits' A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are met. Any employee who receives taxable fringe benefits will have to include the fair market value of the benefit in their taxable income for the year, which will be subject to tax withholdings, and social security benefits payments.

Investopedia explains 'Fringe Benefits'

Fringe benefits commonly include health insurance, group term life coverage, education reimbursement, childcare and assistance reimbursement, cafeteria plans, employee discounts, personal use of a company owned vehicle and other similar benefits.

Fringe benefits are benefits that don't usually make part of your fixed component, but are added benefits mainly because of the position/designation you hold in the organization, fringe benefits therefore vary from employee to employee as per their grades in the organization. Fringe benefits include benefits such as Car + Diesel Allowance, House decoration and renovation allowance, School admission for employee's children, and such benefits that mostly personal in nature. The day to day application of the term "fringe" means on the edge of something. Fringe benefits are benefits that you get indirectly from your employment i.e. they are sort of a side effect of the job and a direct form of payment by the employer. Fringe benefits take on a vast array of forms and can include anything from the boss paying your bills, providing free accommodation, use of a car, free holidays etc. These benefits are taxed because it used to be used a means of avoiding tax .. where the employer instead of paying someone $50,000 (which the employee would be taxed on) they would pay $20,000 and perhaps pay all the employees rent or mortgage payments etc. The employee would then get the benefits of $50,000 income but was only taxed on part of it... hence the fringe benefits tax regime. FBT is really complex so the most simplistic way of looking at is is a fringe benefit is any thing you gain/benefit from that you haven't had to pay for and which if you had a different job/ employer you wouldn't get. Typically company cars for executives to drive around in but also get to use them for private purposes outside of work hours would be a fringe benefit because in any other situation you would have to use your own car to go to the shops or touring around at the weekend.

Fringe Benefits are nontaxable, partially taxable, or tax-deferred. These terms are defined below. Taxable Taxable means the benefit is included in the employees' wages and generally is subject to income tax withholding, social security (unless the employee has already reached the current year social security wage base limit), and Medicare. If the recipient is an employee, this amount is includible as wages. For example, bonuses are always taxable. Partially taxable - Part is excluded and part is taxable. Tax-deferred Benefit is not taxable when received, but subject to tax later. For example, employer contributions to an employee's pension plan may not be taxable when made, but may be taxed when distributed to the employee.

THEORETICAL BACKGROUND
The major objective of fringe benefit packages is to offer employees with benefits that are valuable enough to encourage them to stay longer with the company . This is consistent with the practitioner oriented theory which states that, employers need to modify fringe benefits to effectively, recruit, and retain a diverse demographic employees base. Whilst money wage is the most generalized force available in organizations to shape employees behavior, fringe benefits are incentives that respond to more specific needs of diverse group of employees in the organization point out that, in the era of globalization where information flows are free from one company to another as well as from one country to another, most organizations are at risk of loosing the most talented employees. This is because talent employees are free to search and choose employers who have a benefit mix which corresponds to their utility functions. In this respect, organizations are struggling hard to offer and adjust fringe benefits packages so as to meet employees expectations and preferences. In this respect, the key to positively influencing employees is for the employers to offer benefits that employees view as important. However, organizations cannot realize the full potential of offering competitive fringe benefits unless employees have sufficient knowledge about these packages. If the benefit is not positively valued by the employee, it falls within the employees zone of indifference and the presence or absence of such benefit in the workplace have little effect to that employees. Literature suggest that, a benefit will be valued more highly if employees have accurate knowledge of the benefits offered to them. Accordingly, employees who have accurate view of their benefit coverage seem to have higher valuation of the benefits they receive and are satisfied with their benefit packages than employees who are less informed of their benefits.

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Beginning in the 1970s, employers began providing fringe benefits in the form of cafeteria or flexible benefit plans whereby employees could choose from a menu of several compensation options, including cash and several fringe benefits. These fringe benefits were made nontaxable in 1978. A related approach is the flexible spending plan, or salary reduction arrangement, which allows employees to set aside pretax dollars to spend on certain expenses (mostly health and child care) not covered by existing benefit plans.

Most of the statutory fringe benefits receive tax preferences only if provided in a nondiscriminatory manner, dating back to 1942, when nondiscrimination rules governing pensions were instituted. Other important limits are the $50,000 limit on the amount of term life insurance that can be provided tax-free to employees, the various restrictions and funding rules for pension and stock plans initiated by the Employee Retirement Income Security Act of 1974, and nondiscrimination and plan qualification rules for health and life insurance plans. By the early 1980s, several other fringe benefits had received statutory exclusions: up to $5,000 of death benefits, parsonage allowances, certain benefits provided to members of the Armed Services, meals and lodging for the convenience of the employer, group legal services, commuting through van pools, dependent care assistance, and employee educational assistance. The statutes governing van pooling and educational assistance expired in the mid-1980s. Many other miscellaneous fringe benefits had always been untaxed even without statutory provisions; the Tax Reform Act of 1984 formalized the exclusions of any miscellaneous fringe benefits that meet one of five criteria: a noadditional-cost service, a qualified employee discount, a working- condition fringe, a de minims fringe, or a qualified tuition reduction. Special rules were written for parking, eating, and on-site athletic facilities.The U.S. income tax has always excluded some forms of
compensation from the individual income tax base, while employers have always been allowed to deduct the cost of fringe benefits as well as wages from their taxable incomes. Employer contributions for accident and health insurance plans were non- taxable in the original income tax in 1913, although there was some ambiguity about the tax status of fringe benefits until the Internal Revenue Code of 1954. Similarly, term life insurance premiums be- came tax-exempt in 1920 and deferred compensation plans received favorable tax status in 1921.
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FEATURES OF FRINGE BENEFITS:

Different from regular wages: Fringe benefits are different from regular wages as such benefits are those payments, which an employee enjoys in addition to wages he receives. It is a supplementary payment and provides support to an employee.

Employee motivation: Fringe benefits are not given to employees for performing certain jobs. The purpose is to encourage them to take more interest in the assigned work. Useful but avoidable expenditure: Fringe benefits constitute a labour cost for the employer. Not directly linked with efforts: Fringe benefits are not direct reward for the efforts made or the production given by an employee. Beneficial to all employees: Fringe benefits are a labour cost but its benefits should be made available to the entire labour force and not to a small group of employees.

OBJECTIVES OF FRINGE BENEFITS

The view point of employers is that fringe benefits form an important part of employee incentives to obtain their loyalty and retaining them. The important objectives of fringe benefits are: 1. To create and improve sound industrial relations 2. To boost up employee morale. 3. To motivate the employees by identifying and satisfying their unsatisfied needs. 4. To provide qualitative work environment and work life. 5. To provide security to the employees against social risks like old age benefits and maternity benefits. 6. To protect the health of the employees and to provide safety to the employees against accidents. 7. To promote employees welfare by providing welfare measures like recreation facilities. 8. To create a sense of belongingness among employees and to retain them. Hence, fringe benefits are called golden hand-cuffs. 9. To meet requirements of various legislations relating to fringe benefits.

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Need for Fringe Benefits to Employees

Rising prices and cost of living has brought about incessant demand for provision of extra benefit to the employees. Employers too have found that fringe benefits present attractive areas of negotiation when large wage and salary increases are not feasible. As organizations have developed ore elaborate fringe benefits programs for their employees, greater pressure has been placed upon competing organizations to match these benefits in order to attract and keep employees. Recognition that fringe benefits are non-taxable rewards has been major stimulus to their expansion. Rapid industrialization, increasingly heavy urbanization and the growth of a capitalistic economy have made it difficult for most employees to protect themselves against the adverse impact of these developments. Since it was workers who are responsible for production, it was held that employers should accept responsibility for meeting some of the needs of their employees. As a result, some benefits-and-services programs were adopted by employers The growing volume of labor legislation, particularly social security legislation, made it imperative for employers to share equally with their employees the cost of old age, survivor and disability benefits. The growth and strength of trade unions has substantially influenced the growth of company benefits and services. Labor scarcity and competition for qualified personnel has led to the initiation, evolution and implementation of a number of compensation plans. The management has increasingly realized its responsibility towards its employees and has come to the conclusion that the benefits of increase in productivity resulting from increasing industrialization should go, at least partly, to the employees who are responsible for it, so that they may be protected against the insecurity arising from unemployment, sickness, injury and old age. Company benefits-and-services programs are among some of the mechanisms which managers use to supply this security.

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TYPES OF FRINGES/ FRINGE BENEFITS:

(1) Payment for time not worked by the employee: Holidays. Vacations. Leave with pay and allowances.

(2) Contingent and deferred benefits: Pension payment. Group life insurance benefit. Group health insurance. Sick leave, maternity leave, child care leave, etc. Suggestion/service award Severance pay.

(3) Legally required payments: Old age, disability and health insurance Unemployment compensation Worker's compensation.

(4) Misc. benefits: Travel allowances. Company car and membership of clubs, etc Moving expenses. Child care facilities. Tool expenses and meal allowances, etc

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FRINGE BENEFITS PROVIDED BY THE ORGANIZATION

Organizations provide a variety of fringe benefits. The fringe benefits are classified under four heads as given here under:

For Employment Security : Physical and job security to the employee should also be provided with a view to promoting security to the employee and his family members. The benefit of confirmation of the employee on the job creates a sense of job security. Further a minimum and continuous wage or salary gives a sense of security to the life. Benefits under this head include unemployment, insurance, technological adjustment pay, leave travel pay, overtime pay, level for negotiation, leave for maternity, leave for grievances, holidays, cost of living bonus, call-back pay, lay-off, retiring rooms, jobs to the sons/daughters of the employees and the like.

For Health Protection: Benefits under this head include accident insurance, disability insurance, health insurance, hospitalization, life insurance, medical care, sick benefits, sick leave, etc.

For Old Age and Retirement: Benefits under this category include: deferred income plans, pension, gratuity, provident fund, old age assistance, old age counseling , medical benefits for retired employees, traveling concession to retired employees, jobs to sons/daughters of the deceased employee and the like.

For Personnel Identification, Participation and Stimulation: This category covers the following benefits: anniversary awards, attendance bonus, canteen, cooperative credit societies, educational facilities, beauty parlor services, housing, income tax aid, counseling, quality bonus, recreational programs, stress counseling, safety measures etc.

Retrenchment Compensation: The Industrial Disputes Act, 1947 provides for the payment of compensation in case of lay-off and retrenchment. The non-seasonal industrial establishments employing 50 or more workers have to give one months notice or one months wages to all the workers who are retrenched after one years continuous service. The compensation is paid at the rate of 15 days wage for every
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completed year of service with a maximum of 45 days wage in a year. Workers are eligible for compensation as stated above even in case of closing down of undertakings.

Lay-off Compensation: In case of lay-off, employees are entitled to lay-off compensation at the rate to 50% of the total of the basic wage and dearness allowance for the period of their lay-off except for weekly holidays. Lay-off compensation can normally be paid up to 45 days in a year.

Safety and Health: Employees safety and health should be taken care of in order to protect the employee against accidents, unhealthy working conditions and to protect workers capacity. In India, the Factories Act, 1948, stipulated certain requirements regarding working conditions with a view to provide safe working environment. These provisions relate to cleanliness, disposal of waste and effluents, ventilation and temperature, dust and fume, artificial humidification, over-crowding, lighting, drinking water, latrine urinals, and spittoons. Provisions relating to safety measures include fencing of machinery, work on or near machinery in motion, employment of young persons on dangerous machines, striking gear and devices for cutting off power, self-acting machines, easing of new machinery, probation of employment of women and children near cotton openers, hoists and lifts, lifting machines, chains ropes and lifting tackles, revolving machinery, pressure plant, floors, excessive weights, protection of eyes, precautions against dangerous fumes, explosive or inflammable dust, gas etc. Precautions in case of fire, power to require specifications of defective parts of test of stability, safety of buildings and machinery etc.

Boxes at sporting venue If a company purchases or leases a skybox or luxury box at a sporting venue, the company can deduct no more than the price of the same number of regular seats at that venue. Other associated expenses (catering, for example), must be "ordinary and necessary" to the business to be deductible as entertainment expenses. A box purchased or leased for the benefit of a specific executive may be taxable income.

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 Awards/Bonuses Awards or bonuses are considered compensation. Be careful about providing non cash payments "on behalf of" executives. If these payments appear to be personal they are not deductible to the company and they are taxable to the executive.

Club memberships or club dues Club memberships or club dues of all kinds are not deductible unless they have a specific business purpose (a trade group, for example). This includes social, athletic, sporting, luncheon, airline, and hotel clubs. The purpose of the club ("business related") not the name is controlling. If the cost is deductible, it is taxable income to the executive.

Company credit cards Many companies allow employees to use credit cards to buy items for the company. Some companies issue credit cards to executives and pay the bills without requiring the executive to show business purpose. Personal expenses paid through these credit cards to executives are considered taxable fringe benefits and they cannot be deducted as business expenses.

Executive dining room Meals furnished on employer premises and for the convenience of the employer may be excluded from the income of the executive if the cost meets the "de minimis fringe" test to be excluded from employee income.

Loans to executives The IRS will assume that a loan to an executive is really compensation, unless it can be shown that the loan is bona fide. Factors showing a loan is bona fide are (1) existence of a promissory note, (2) cash payments on a specified schedule, (3) interest charges, and (4) security. The loan should be listed as a receivable on the company books, and the interest rate should be at market rate. Personal loans to officers and directors of public companies are banned by the SarbanesOxley Act of 2002.

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 Discounts. Discounts on property or services provided to customers must be provided to all employees on a non-discriminatory basis. The IRS does not allow company discounts for directors and independent contractors. It is not clear from this IRS article whether these discounts are taxable to employees or if the value of these discounts is a deductible business expense to employers.

Spouse/dependent life insurance The value of spouse or dependent life insurance must be included in the income of the executive. Since there is no business purpose for this benefit, it is probably not deductible to the company.

Transportation/car for use of employee If an employer provides a car or other vehicle for an executive's use, the amount may be excluded from income up to the amount that would be allowable as a deductible business expense if the executive paid for its use. The executive's personal use of the vehicle is taxable.

Employer-paid parking Parking and transit passes are not taxable to the employee if specific monthly limits are not exceeded. It is not clear from this article what these limits are. Check with your tax adviser.

Employee use of listed property Listed property like laptop computers and cell phones. If you provide a laptop for an executive, keep detailed records to establish business use of computers that can be taken home or are kept at home by the executives. There are no record keeping exceptions like "no personal use" available for computers.

Cell phones and car phones provided for executives may also be excluded from an executive's income if detailed records are kept showing documentation of business usage for purchase and operation.

Relocation Relocation expenses paid by employers are usually considered taxable income to employees. Only the costs of moving personal belongings and traveling to the new location are deductible. Costs such as meals and lodging in temporary quarters are not deductible. In addition, other costs
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paid by the employer, such as brokerage fees, property taxes, insurance, fix-up expenses, and reimbursement for losses with respect to the sale of the prior home are included in gross income of the employee.

Vacations If you pay for a vacation for an executive (hotels, air fare, and other expenses), the value of the vacation is considered personal must be included in the executive's gross income. The value is also not deductible to the employer as a business expense.

Spouse/dependent/other individual travel with an executive Payments for a spouse, dependent, or other individual to travel with an executive are not deductible business expenses unless (a) the individual is an employee, (b) the travel of the individual is for bona fide business purposes, and (c) the expenses would otherwise be deductible by the individual. To justify these exceptions, keep good records on the purpose of the trip and the amount of time spent by this individual on business purposes.

Financial planning, wealth management Financial planning or wealth management services provided to executives are considered a taxable fringe benefit. It is doubtful that they would qualify as deductible business expenses.

Qualified retirement planning services If you have a qualified retirement plan, you may provide employees with retirement planning services; these services are not considered as income for the employees. Your company may not discriminate in favor of highly compensated executives in providing these services.

The fringe benefits are categorized as follows:

a)Payment for Time Not worked: Benefits under this category include: sick leave with pay, vacation pay, paid rest and relief time, paid lunch periods, grievance time, bargaining time, travel time etc.

b)Extra Pay for time Worked: This category covers the benefits such as: premium pay, incentive bonus, shift premium, old age insurance, profit sharing, unemployment compensation, Christmas bonus, Diwali or Pooja bonus, food cost subsidy, housing subsidy, recreation.
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MERITS & DEMERITS OF FRINGE BENEFITS

ADVANTAGES OF FRINGE BENEFITS

Employers advantages: Employers have several reasons why they provide fringe benefits even if this means additional expenses.

With extensive health coverage plans, companies can keep their key employees and workers who provide satisfying service. Usually, most employers enjoy tax breaks especially if they provide group health plans. Workers will usually prefer better fringe benefits than higher salary, allowing employers to

reduce their expenses. Several studies suggested that employees who are covered by a good health insurance are less

likely to be absent from their work. When receiving benefits, workers will think that their companies are good employers, boosting

their morale and improving their work ethics. Employers may get personal benefits for less money if they will purchase a group health coverage for their workers. Boost employee's morale and pride in the company. Helps attract and retain better qualified employees. Provides high risk coverage at low costs easing the company's financial burden. Improves efficiency and productivity as employees are assured of security for themselves and their families. Premiums are tax deductible as corporation expense, which means savings with quality coverage. Employees advantages: There are certain advantages of Fringe benefits. These are: Fringe benefits provide support to remuneration paid to employees. Fringe benefits improve efficiency and productivity of employees. Fringe benefits act as an added attraction to the employees. Fringe benefits reduce monotony and fatigue of employees. They make employees efficient and co-operative for whatever organizational changes required to be introduced.
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 Fringe benefits raise morale of the employees. They develop affinity for the organization. Fringe benefits develop good corporate image and raise market standing of the organization. Fringe benefits act as a motivating force. They motivate employees and induce them to work for the progress and prosperity of the organization. Provide tax benefit to the employees. Peace of mind leading to better productivity as employees are assured of provision for themselves and families in any mishap. Employees with personal life insurance enjoy additional protection. Confidence in company's employee benefit schemes boost staff morale and pride in company.

DISADVANTAGES OF FRINGE BENEFITS

Employers disadvantages: While giving fringe benefits will have significant advantages to employers and workers, but there are some of the drawbacks according to an employment attorney:

For small employers, fringe benefits will cost more. Also, they have less choice in drafting their workers retirement or health plan because of administrative costs. The cost of health insurance coverage is steadily rising in the US, making it less affordable to

most employers especially in tough economic times. The more benefits a company will provide, the higher the administrative fees will cost. Employers may face lawsuit (usually on the basis of discrimination) if they fail to provide fringe benefits to all workers or exclude someone from receiving this.

Employees disadvantages: There are some limitations of Fringe Benefits. These are: Fringe Benefits may lead to unhealthy competition among employees The expected benefit may not be available if the monetary benefits are not adequately attractive to employees. The motivation may not be as per expectation if the implementation of the benefits scheme is not transparent.

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THE CONCEPT OF FRINGE BENEFITS IN THE ORGANIZATION.

The human concept of labor has been recognized widely in the industrial world. The employer, though not bound, provides several benefits and services to the employees, working in the organization to maintain and promote the employees favorable attitude towards the work and work environment, because maintenance of favorable attitude towards the work and work environment, because maintenance of favorable attitude is an essential part of motivation and high morale. Such benefits and services, being a part of wage and salary administration, include all expenditure incurred to benefit employees over and above regular wages and direct monetary incentives related to output and are generally referred to as fringe benefits. The real wages of workers are increased by the benefits provided by the employer and thus, they are regarded as supplement to their wages. Many years ago, benefits and services were labeled fringe benefits because they were relatively insignificant or fringe components of compensation. However, the situation now is different, as these have, more or less, become important part of a comprehensive compensation package offered by employers to employees.

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TAXATION OF FRINGE BENEFITS

Fringe Benefit Tax (FBT) is a tax levied on perquisites-or fringe benefits -provided by an employer to his employees, in addition to the cash salary or wages paid. Fringe Benefit Tax was introduced in India in the year 2005-2006.

Fringe Benefit Tax is subject to varying treatment in different countries. These benefits are either taxed in the hands of the employees themselves or the value of such benefits is subject to a 'fringe benefit tax' in the hands of the employer.

The rationale for levying a fringe benefit tax on the employer lies in the inherent difficulty in isolating the 'personal element' where there is collective enjoyment of such benefits and attributing the same directly to the employee.

Moreover, in cases where the employer directly reimburses the employee for expenses incurred, it becomes difficult to effectively capture the true extent of the perquisite provided because of the problem of cash flow in the hands of the employer.

Therefore, a two-pronged approach has been adopted for the taxation of fringe benefits under the Income-tax Act.

Perquisites which can be directly attributed to the employees are taxed in their hands in accordance with the existing provisions of section 17(2) of the Income-tax Act and subject to the method of valuation outlined in rule 3 of the Income-tax Rules. In cases, where attribution of the personal benefit poses problems, or for some reasons, it is not feasible to tax the benefits in the hands of the employee, it is proposed to levy a separate tax known as the fringe benefit tax on the employer on the value of such benefits provided or deemed to have been provided to the employees.

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Fringe benefits shall be deemed to have been provided if the employer has incurred any expense or made any payment for the purposes of: (a) entertainment; (b) festival celebrations; (c) gifts; (d) use of club facilities; (e) provision of hospitality of every kind to any person whether by way of food and beverage or in any other manner, excluding food or beverages provided to the employees in the office or factory; (f) maintenance of guest house; (g) conference; (h) employee welfare; (i) use of health club, sports and similar facilities; (j) sales promotion, including publicity; (k) conveyance, tour and travel, including foreign travel expenses; (l) hotel boarding and lodging; (m) repair, running and maintenance of motor cars; (n) repair, running and maintenance of aircraft; (o) consumption of fuel other than industrial fuel; (p) use of telephone; (q) scholarship to the children of the employees.

Fringe Benefit Tax in India

The fringe benefits tax (FBT) was the tax applied to most, although not all, fringe benefits in India. A new tax was imposed on employers by India's Finance Act 2005 was introduced for the financial year commencing April 1, 2005. The fringe benefit tax was abolished in the Finance Bill of 2009 by Finance Minister Pranab Mukherjee. The FBT was imposed on the following entities: 1 Company 2 Firm 3 Association of person and body of individuals 4 Local authority 5 Artificial juridical persons

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Exempted Entities. The following are not considered employers for the purpose of fringe benefit tax: * An individual, * A Hindu undivided family, * Entity eligible for exemption under section 10(23C) or registered under 12AA, * Central Government or State Government, and * A political party.

Value of Fringe Benefits

1. For the expenses under entertainment, employee welfare, conference, conveyance, company car, sales promotion, hospitality, hotel & lodging, telephone and maintenance of accommodation, 20% of the total amount is taxable.

2. For the expenses under festival celebrations, use of health club and other clubs, gifts and scholarship, 50% of the total amount is taxable.

3. For the tour, travel and foreign travel expenses, 5% of the total amount is taxable (value as per section 115WC).

4. Any free or concessional ticket provided by the employer for private journeys of his employees or their family members--100% of the cost minus any recovery from the employee.

5. Any contribution by the employer to an approved superannuation fund for employees--100% of the amount in excess of Rs. 1,00,000 for each employee.

6. Any specified security or sweat equity shares allotted/transferred to his employee free of cost or at concessional rate--100% of fair market value (FMV) of the specified security or sweat equity shares on the date on which options vest with the employee minus the amount actually paid by the employee.

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FRINGE BENEFITS TAX ABOLISHED IN INDIA

The Indian government abolished the Fringe Benefit Tax (FBT) as part of its 2009-10 budget on 6 July 2009. This amendment, which shifts the burden of taxation on fringe benefits from employers to employees, will come into effect on 1 April 2010.Fringe Benefit Tax was introduced in the 2005-06 fiscal year as a tax paid by employers on the portion of employee benefits not included within an employees salary. This included entertainment, gifts, concessional tickets for private journeys, employee stock options, etc. As a result of the recent amendment, however, fringe benefits will now be taxed as perquisites and treated as taxable income. Employees will also be taxed on any sweat equity shares they own (shares given to employees on favorable terms), or employee stock ownership plans they participate in. They will also be taxed on any contribution in excess of INR 100,000 (USD 2,075) to an approved pension fund made by plan sponsors on their behalf.

FBT was introduced during the previous regime of the UPA government, with a view to ensure that all considerations paid by the employer to the employee fell under the purview of income tax. In a way, the tax rendered rightful, all types of payments made by employers to employees. Companies could pay perquisites to employees and pay FBT of around 6-10 per cent, which was recovered from the employees. Employees had little to complain about because the rate of FBT was far lower than the perquisite tax they would have to pay on these benefits (perquisites would be taxed at the regular tax rates; highest being 30 per cent).

with the abolition of FBT, there are several questions about the real benefits. Tax expert believes that employees were actually better off with FBT. "Perk tax was what was applicable earlier before FBT came in the picture. All FBT items will be now added to the employee's income as perks and taxed at slab rates applicable."

While, ESOPs will no longer be subject to FBT, now they will be subject to perquisite tax in the hands of the employees. The perk tax will be the difference between the Fair Market Value (FMV) of the shares on the date of exercise of the options less the exercise price. The story does not end here. Upon sale, capital gains tax will also be payable. Capital gains will be calculated on the difference between the sale price of the shares as reduced by the aforementioned FMV.
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GROWTH OF FRINGE BENEFITS

Relative to cash pay, fringe benefits' have increased phenomenally during the past three decades.Although the official social security projections include the assumption that this phenomenal rate of growth will continue, no attention has been paid to the implications such growth is likely to have for long-range deficits in the social security trust fund .The projections assume that employer costs for fringe benefits will increase faster than cash wages at an annual compound rate of 0.4 percent, the average annual rate during 1950-80, over the entire 75-year period after 1980. Thus, the ratio of fringes to total compensation would rise from 15.8 percent in 1980 to 37.8 percent in the year 2055, and conversely, cash pay would decline from 84.2 percent to 62.2 percent.'-Any increase in fringes relative to workers' cash pay (taxable payroll) is very important because such pay is the tax base that finances social security . Fringes accepted in lieu of tax- able pay reduce this base, and boost the percentage of taxable payroll required for paying benefits. When scheduled social security taxes(as a percentage of taxable payroll) are less than scheduled benefit payments(also as a percentage of taxable payroll),deficit results, which is the current situation. Ultimately, there-fore, the estimated cost of benefits as a percentage of taxable payroll determines how high social security tax rates need to be for the program to be self-supporting. For this reason, the Trustees of the social security pro- gram use the percentage of taxable payroll figure in re- porting to Congress on the long-range financial health of the system, and Congress, in turn, uses this percent- age as a yardstick in considering changes in the program .

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BEYOND THE FRINGE BENEFITS

What were once popularly referred to as "fringe benefits" came into prominence during World War II. In the face of federal wage controls to curb inflation, employers began to offer benefits to attract, motivate, and retain employees. Eventually, these various benefits programs, instead of being on the fringe of a worker's compensation, became an expected and valuable part of a complete employment package. Today the formal benefits programs offered to employees generally make up roughly one third of the average worker's total compensation, depending on the size, profitability, and philosophy of a given employer. When these programs are properly planned and promoted, they yield attractive advantages for both employees and employers. Although the basic shape and intent of benefits programs have remained the same for the past twenty-five years or so, new developments and revisions to existing programs have occurred because of changes in the general business environment. Among the factors affecting benefits offerings are shifts in workforce demographics, new legislation, and the rising cost of medical care. In the five decades from the early 1950s to the first years of the twenty-first century, the number of women in the workforce increased dramatically, leading to increased programs designed to help working mothers. In the early 1950s fewer than 30 percent of women worked outside the home. In 2004 nearly half of U.S. workers (46.8 percent) were women. Almost two thirds (62.2 percent) of women with children under six years of age were in the civilian labor force in 2004, a significant increase from 18 percent in the mid-1950s. This change has resulted in greater emphasis on day care, flexible work schedules, and leaves of absence to care for children. Longer life spans and the number of baby boomers (people born in the years immediately following the end of World War II) approaching retirement age also will lead to changes in worker benefits. Employee pension plans will take on greater importance. Younger employees also will need a sourcepresumably through their employersof affordable elder care and time off to care for aging parents. Legislation passed during the 1990s, such as the Americans with Disabilities Act, the Family and Medical Leave Act, and the Health Insurance Portability and Accountability Act, placed additional pressure on benefits programs; some states also have passed similar legislation. Other statutory benefits programs provide a basic level of protection for nearly all American workers.
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Most employers still offer conventional health care coverage through commercial insurance companies or not-for-profit agencies such as Blue Cross and Blue Shield. Conventional health insurance plans usually have two parts: basic medical coverage and major medical coverage. Basic coverage pays for most medical visits and other services up to a certain dollar limit. Major medical plans, designed to protect against large bills or catastrophic illness, take over when basic insurance runs out. They cover all medical costs, usually up to a certain lifetime amount. Some employers offer complete, or "first dollar," coverage; others offer less generous plans. The most common plans offer no reimbursement unless an employee's medical costs exceed a set annual deductible ($200 to $300 is fairly typical), which comes out of the employee's pocket. Other plans, known as "coinsurance plans," pay a certain percentage (most commonly, 80 percent) of the employee's medical expenses, leaving the employee responsible for the rest. Many insurance plans incorporate a combination of deductible and coinsurance plans. The costs of traditional plans are prohibitive for many employers. The 1990s saw the rise of health maintenance organizations (HMOs). HMOs provide comprehensive health care coverage to employers at a fixed rate, which make them a popular alternative to the traditional, or indemnity, plans. While HMOs are cost-effective for employers, employee reaction to them has been mixed. Employee costs are generally less than with a traditional plan, but the restrictions on choices of physicians and hospitals is a source of dissatisfaction for some. In recent years there has been a decline in HMO enrollment. According to a report published in 2001, in the years between 1996 and 2001 HMO enrollment fell from 31 percent of employees to 23 percent. Many employers offered a variety of managed care arrangements to allow their employees a greater degree of flexibility in choosing coverage; during that same time period, enrollment in point of service (POS) and preferred provider organization (PPO) plans showed marked increases. Some employers contract with HMOs or other organizations to provide preventive programs. These "wellness programs," as they are known, typically consist of health screenings such as cholesterol and blood pressure tests, weight loss or smoking cessation courses, and fitness training. Some large companies offer on-site exercise facilities. Companies are finding that a small investment in preventive health programs can reduce health insurance costs and costs associated with absenteeism. A large number of employers also offer a way for their employees to afford medical expenses that are not covered by their health insurance plans. These flexible spending accounts allow employees
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to have deductions made on a pre-tax basis from their paychecks. While the IRS puts no limit on the deduction amount, most companies set the limit somewhere between $2,500 and $5,000. During the year, as employees incur non-reimbursable medical expenses such as deductibles, charges for elective surgery, mileage, and the like, they can draw on the flexible spending account. The tax advantages of arrangements such as these can be significant. The major drawback to the plan has been that tax rules dictate that any funds left in the account at the end of the year are forfeited, which requires advanced planning and realistic anticipation of expenses on the employee's part. However, a new type of plan approved by the IRS in 2002, health reimbursement arrangements (HRAs), offered an attractive alternative to flexible spending accounts. In an HRA an employer funds an account for the employee's medical expenses. Any funds not used in the account may be rolled over from year to year. If the funds in the account are exhausted, the employee generally must pay for medical expenses until a deductible is met, after which time the employer covers the majority of medical costs, generally 80 percent or 90 percent. The difficult economy has created a challenge for employers, who face balancing the need to provide competitive health care coverage with the need to contain costs. In addition to instituting alternatives such as PPO or POS plans, some employers concerned with watching costs encourage employees to seek less costly forms of health care. Some require mandatory second opinions, shorter hospitalizations, and a greater reliance on outpatient surgery in order to provide an attractive level of coverage that still meets budgetary requirements. Overall, rising health care costs have translated to higher contributions for employees. According to the National Coalition on Health Care, insurance premiums increased by 10 percent in 2005. This increase was nearly three times the rate of inflation. The annual family health plan premium averaged $10,800.

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CASE STUDY

Car Fringe Benefit

Lance is provided with the use of a car by his employer, the Discovery Channel. During the 2008 year, he attends a 3 week conference in France. Whilst in France, Lances car is garaged at his employers business premises. Lance also provides a written statement confirming that the car was not used by any of his associates for private purposes during this time. In addition, the Chief Finance Officer at Discovery Channel also maintains a diary documenting Lances trip. Can Discovery Channel reduce the days available for private use for the time Lance was away and his car was garaged at business premises? What other types of evidence might Discovery Channel maintain to enable a reduction to days available for private use? Would it make a difference if the car was garaged at Lances residence? Solution: Yes, it would appear Discovery Channel can reduce the days available for private use for the time Lance was away. The ATO expect that documentary evidence in the form of log books, diaries, fleet management records are maintained. However, it is important to note this is a question of fact and will depend on the circumstances. An employer should ensure appropriate procedures are in place to

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reduce days available for private use throughout the FBT year. Employees should have clear guidelines as to what will constitute a reduction to days available for private use. Yes, it would make a substantial difference if the car was garaged at Lances residence because the car is considered available for private use. As such, a car fringe benefit arises because the car is garaged at Lances residence. The car is deemed to be available for private use regardless of the actual use. It would be very difficult to prove that the car has not been made available for private use.

Goods & Services Tax A payment made by a government entity to a non-government entity can be an appropriation for GST purposes 1. 2. 3. A grant is a taxable supply if the recipient enters into a binding obligation If entities are grouped for GST purposes all members must lodge a separate BAS Appropriations paid by a government related entity is excluded from the definition of consideration 4. If an adjustment event occurs and a tax invoice was issued for the supply, the entity that issued the tax invoice is required to issue an adjustment note 5. 6. A gift made to a non-profit organization will have no GST implications The GST liability for non-monetary consideration will be 1/11th of the value of what is supplied and not what is received 7. Where an employee leaves an agency, neither the receiving agency nor the leaving agency are required to account for GST in respect to the payment of long service leave and annual leave entitlements.

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solution: 1. A payment made by a government entity to a non-government entity can be an appropriation for GST purposes True refer section 9-15(3)(c) of the GST Act. A payment made by a government related entity to another government related entity is not the provision of consideration if the payment is specifically covered under an Australian Law. Refer also GSTR 2006/11. 2. A grant is a taxable supply if the recipient enters into a binding obligation True as long as all the requirements of a taxable supply under section 9-5 of the GST Act are met, entering into a binding obligation will usually constitute a supply. 3. If entities are grouped for GST purposes all members must lodge a separate BAS False registering as a group means that only the representative member needs to lodge a BAS. 4. Appropriations paid by a government related entity is excluded from the definition of consideration True refer 1 above. 5. If an adjustment event occurs and a tax invoice was issued for the supply, the entity that issued the tax invoice is required to issue an adjustment note True distinguish between a correction and adjustment event. An adjustment event will occur where a supply or acquisition is cancelled. However, a correction arises from a genuine and reasonable mistake. Important to note that if a recipient created tax invoice was issued by the customer for the supply, then the customer is similarly responsible for issuing an adjustment note relating to that supply. The GST Act requires that adjustments be reported in the tax period in which you became aware of the adjustment event. Corrections can generally be made in the next BAS subject to timing and amount limits (refer ATO Guide Correcting GST mistakes). 6. A gift made to a non-profit organization will have no GST implications True however must ascertain whether the gift is a true gift and meets the common law tests of a gift.

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7. The GST liability for non-monetary consideration will be 1/11th of the value of what is supplied and not what is received True GST is determined based on the value of taxable supplies. The value is the price multiplied by 10/11th and price includes monetary consideration as well as the GST inclusive market value of any non-monetary consideration. 8. Where an employee leaves an agency, neither the receiving agency nor the leaving agency are required to account for GST in respect to the payment of long service leave and annual leave entitlements True The ATO interpretation has been that the transfer of staff and associated payment for long service leave and annual leave entitlements does not constitute a supply or consideration for GST purposes. This applies only in situations where there is a legal or statutory requirement to transfer staff.

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CONCLUSION
Many economists and tax experts think that some form of taxation of fringe benefits would be desirable. They believe that both efficiency and equity would be improved. Potentially large amounts of revenue could be raised, which could be used to finance new government spending, lower other taxes, or reduce the government budget deficit. Public op- position is strong, however, and there is no indication that any reform will be enacted soon. The relationship between tax incentives and the provision of fringe benefits has been the subject of many studies, although the data problems outlined earlier plague this research as well. There is some evidence that favorable tax treatment has led to an increase in the number of employees who receive various kinds of fringe benefits. There is also agreement that the tax advantage from paying compensation in the form of fringes rather than wages affects the share of fringes in total compensation. The magnitude of this effect, however, is uncertain. The results of some studies imply that full taxation of fringe benefits would cut by half or more the share of compensation paid in the form of fringes. Other studies find much smaller effects, with the fringe share of compensation falling by less than 15 percent if benefits were taxed fully. Economic theory strongly suggests that the incidence of fringe benefit costs, and thus the incidence of tax preferences as well, is borne by the workers. Most of the arguments made in public de- bate about fringe benefits, however, are clearly based on the presumption that employers bear the costs (and receive the tax benefits). Statistical evidence has been inconclusive, although more and more studies are finding significant tradeoffs be- tween wages and a variety of fringe benefits (consistent with employee incidence). Tax preferences for fringe benefits may also have important effects in labor markets. The cost of labor is reduced differentially across firms and individuals, because the tax benefits increase with higher marginal tax rates. This effect may differ across workers, and some firms have cost advantages over others. Moreover, if employee preferences for fringes vary with skill levels, firms that use the skills of workers with a stronger preference for fringe benefits disproportionately may have lower costs than firms using other skill levels. Because fringe benefits are tied to jobs, when compensation is paid in the form of fringes, labor mobility may be reduced, although this has some good as well as bad effects. Some kinds of fringe benefits, notably pensions, can also affect the timing of retirement as well as quitting behavior.
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The tax preferences given pensions and other deferred compensation plans may have an effect on national saving, although the effect is ambiguous because the tax preferences ceteris paribus lead to a larger government budget deficit. In addition, other forms of private saving may be affected by the amount of saving done in the form of pensions. Fringe benefits as a share of total compensation were quite low until the three decades after World War II, when there was a rapid expansion. This expansion was caused by an increase in the number of fringe benefits offered as well as increased employer contributions to the traditional benefit plans. Rapid growth of fringe benefits as a form of compensation stopped around 1980. The tax advantage to employees of receiving fringe benefits depends on marginal tax rates. Because most fringe benefits are excluded from the federal, state, and Social Security tax bases, the tax price of fringe benefits (that is, the amount of after- tax wages that would be given up for a dollars worth of fringe benefits) is considerably less than $1. Since 1980, the tax price has risen slightly as federal and state marginal tax rates have fallen. Because higher-income taxpayers generally have higher marginal tax rates, they receive a greater advantage. When considering whether to accept a job or to leave an employer, fringe benefits should be taken into consideration as well as the wages offered. For example, if you have worked for a company for several years and have accumulated four weeks of vacation time, you may have to start with only two weeks if you move to a different employer. If you choose to leave your employer to become self-employed, the cost of purchasing benefits on your own may be prohibitive.

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BIBLIOGRAPHY
WEBSITES www.investopedia.com www.ehow.com/fringe-benefits www.mytax.in www.wiki.answers.com www.indiatoday.com BOOKS Shaun Tyson, Essentials of Human Resource Management. Ronald R. Sims, Organizational Success through Effective Human Resources Management.

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