Fringe Benefits are the benefits that are enjoyed by the people working in the organisation, without getting directly accountable for the benefits enjoyed. For example, it may have happened that you have gone to your Dad’s office, and decided that you need to make a telephone call to your friend; or how many times you have asked your relative going on a foreign tour to bring stamps and perfumes from that foreign land? More near to the ground, if you are an employee and get an office car - is it without reason to think that the car has been on certain occasions been used for personal purposes - like stopping in the market to buy vegetables and groceries while on way from office to home? Or for example, if you are posted in a remote locations, and you need to come home on certain occasion to the city - so instead of taking a leave, you convert that into an official tour! The examples are endless. Add to that - that on certain occasions, many small business enterprises instead of showing actual profits would rather prefer to load their accounts with expenses like travel etc. to reduce their profits and thereby reduce their tax liabilities.
So the Government have tried to plug such leakages. The company would show an expense as a business expense, where infact it is the employees who would derive indirect benefits. Instead, if that same amount were paid as salary to the employees, then the employees would have to pay tax on that. Else,that much amount that is shown as business expense is not fully used up in the business, but also includes expense for personal works. It is like that the employees are receiving their remuneration partly in cash and partly in kind!
However, to exactly pin point that so much of the expense claimed are business related, and the others are not business related is a difficult task. An easy way out is presumption. Consequently, FBT is a sort of presumptive taxation that is levied on businesses (other that individual / proprietor) on certain expenses, where it is presumed that certain part of such expense have been used for personal effects, which is in no way related to the business expense.
Initially there has been many apprehensions in this regard as to what the taxation authorities were upto. For example if telephone expense was to be brought under the ambit of the FBT, then what about the call centers and the telecaller marketers - could it be presumed that certain percentage of such telephone bill have been used up for personal use? However, tax authorities in India came out with a detailed explanatory note as to which items and under what circumstances would come under FBT, and how the valuation of the Fringe Benefits would be done.
The provisions relating to levy of FBT are contained in Chapter XII-H (sections 115W to 115WL) of the Income-tax Act, 1961. The details can be found in the circular here.