Fringe Benefit Tax (FBT) is a special tax, which is imposed on employers, if they are providing some specific perquisites (direct or deemed) to the employees during the financial year. As per the provisions of the act, fringe benefits mean any facilities/perks provided by the employers, in way of privilege, service, or amenity, directly or indirectly to the employees. The basic object of the FBT is to maintain equity and fairness to those, who are not getting such type of facilities, since government cannot levy tax on the employees due to different nature of the facilities. Keeping these points in mind, researchers try to explain the concept of FBT in India, the rationale for application of this act, collection of tax revenue and industrial sectors, which are contributing more towards FBT.

The honorable Finance Minister incorporated FBT through the Finance Bill 2005, in the hands of employers for the facilities provided to the employees during the financial year. Fringe benefits mean any consideration paid other than cash, by way of facilities like perks, or otherwise to the employees, including former employees and includes any fee or concessional ticket provided by the employer for the employees or their family members. Besides, it also includes any contribution made by the employers to an approved superannuation fund for his employees; it is a tax, which is imposed on the employer, rather than the employees. Fringe benefit tax is payable by all employers as defined under Section 115w(a) w.e.f April 1, 2005, with respect to fringe benefits provided or deemed to be provided.

The main rationale behind the implementation of FBT is maintaining equity between employees; those who are getting their salary in terms of cash, which is always taxable and those who are getting part of salary in cash and part in perks and facilities. The taxation of facilities is genuine in both the situations on the basis of equity and economic efficiency. When fringe benefits are not taxable, it's not beneficial to horizontal and vertical equity. Since, fringe benefits are always provided to the senior and higher official in the firms, it goes against the vertical equity, if these benefits are not taxed. It also negatively affects two types of companies, those which are providing fringe benefits and those which are not.

In India, before the Assessment Year 1998-99, many perquisites were taxable in the hands of employees, by way of salary as per the provision of Section 17. Large numbers of perquisites were disallowed for the employers at the time of computation of profits from either business or profession. However, due to such kind of provisions, a large number of court cases were filed by the employer's the year after year, due to ambiguity regarding provisions related to some conditions of perquisites. Hence, the government had withdrawn this Disallowance Method of Taxation by the Finance Act, 1997. Within the last 10 years, the number of court cases have significantly decreased due to the withdrawal of the Disallowance Method, which is beneficial from the tax as well as the administrative point of view. The Finance Act 2005, introduced a new tax known as Fringe Benefit Tax on the employers, with the objective of minimizing the number of court cases and collecting a significant revenue against the facilities provided to the employees, besides also maintaining equality between the employers; those who pay their employees fully salary in cash and those who pay partly in cash and partly in perquisites.

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