fringe benefits - hrm project

7/30/2019 Fringe Benefits - Hrm Project

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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


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DECLARATION

I, MR. PANCHAL HIREN SURESH student ofMITHIBAI 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 year2012 - 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)

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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 YEAR2012 - 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

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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.

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TABLE OF CONTENTS

Sr. No. Title Page no.

1 Fringe Benefits 7

2 Theoretical Background 10

3 Features of Fringe Benefits 12

4 Need For Fringe Benefits To Employees 13

5 Types Of Fringe Benefits 14

6 Fringe Benefits Provided By The Organization 15

7 Merits & Demerits Of Fringe Benefits 20

8 The Concept OF Fringe Benefits In The Organization 22

9 Taxation Fringe Benefits 23

10 FBT Abolished In India. 26

11 Growth Of Fringe Benefits 27

12 Beyond The Fringe Benefits 28

13 Case Study 31

14 Conclusion 35

15 Bibliography 37

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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 largecompanies 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.

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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.

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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 touse 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.

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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 op-

tions, 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 no-

additional-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 nontaxable 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 became 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 theproduction 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 Sarbanes-

Oxley 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 participatein. 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 beforeFBT 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 beenpaid to the implications such growth

is likely to have for long-range deficits in the

social security trust fund .The projections

assume that employercosts 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 taxable 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

benefitpayments(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 oftaxable 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 program use the percentage of taxablepayroll figure

in re-porting to Congress on the long-range financial health of the system, and Congress, in turn,

uses this percentage 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 followingthe 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 ofphysicians 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 isgaraged 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. A grant is a taxable supply if the recipient enters into a binding obligation

2. If entities are grouped for GST purposes all members must lodge a separate BAS

3. 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. A gift made to a non-profit organization will have no GST implications

6. The GST liability for non-monetary consideration will be 1/11th of the value of what issupplied 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 between 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 oflabor 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. Be-

cause 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.
http://www.indiatoday.com/http://www.indiatoday.com/http://www.ehow.com/fringehttp://www.ehow.com/fringehttp://www.ehow.com/fringehttp://www.ehow.com/fringehttp://www.ehow.com/fringehttp://www.ehow.com/fringehttp://www.investopedia.com/http://www.investopedia.com/

fringe benefits - hrm project

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