How does FBT abolition impact you?

One of the most important proposals mooted in Budget 2009 announced by the Finance Minister relates to the abolition of Fringe Benefit Tax (FBT) and re-instatement of taxes on perquisites. While, this is good news for the employers, the employees would now be liable to pay income-tax on such benefits as perquisites. Manish Shah from Ernst & Young takes you through the various consequences arising on account of the proposed abolition of FBT.

To begin with, it would be useful to refer to the situation prevailing prior to levy of FBT (i.e. till April 2005). Effective that time, several perquisites which were taxable in the hands of the employees became subject to FBT, some of which are mentioned below:

��� Contribution to approved superannuation fund;
��� Motor Car / running expense reimbursements provided by employer;
��� Chauffeur facility for car;
��� Gift vouchers;
��� Meals;
��� Club memberships; etc

With the proposed abolition of FBT now, it seems like we have moved back to square one and the situation pre-2005 may logically be re-instated. During the FBT regime, some of these expenses were subjected to FBT at a much lower rate, owing to the specific valuation percentages (5%, 20% and 50%) laid down. Therefore, if the FBT is abolished, as proposed, the employee would be required to pay tax on the same on the normal slab rates, assuming that the Government goes back and prescribes the originally taxable perquisites again.

For easier understanding of this matter, let us take a case of Mr Iyer (having other taxable income over Rs 5,00,000) with reference to some benefits being presently received from his employer (on which his employer was paying FBT):

The above table very clearly indicates that in the cases like Mr Iyer, the tax liability on these benefits actually increases substantially. The increase may be lower, in the case of employees having lower taxable income and thereby paying taxes at a lower rate ��� as FBT is presently being levied on the value of fringe benefits at a flat rate. Further, the impact of the increase would also be softened slightly (for the high income group) by the proposed removal of surcharge on income-tax for individual taxpayers only.

Another item which had been moved within the purview of FBT from personal tax was benefits on account of stock options and sweat equity shares. Till 2007, the same were being subjected to tax in the hands of the individual employees and post which, they are subject to FBT in the hands of the employer (although this FBT is specifically allowed to be recovered from the employees by the employer).

With the move to include stock options in FBT and the subsequent clarifications issued by the CBDT had gone a long way to simplify and somewhat settle the manner of their taxation. Prior to this move, benefits on account of stock options/ sweat equity shares were being taxed in the hands of the employees either-

a) on a single-stage basis, ie at the time of sale of shares only (in case of stock option plan being compliant with the prescribed guidelines); or
b) on a two-stage basis, ie first at the time of allotment of shares and later at the time of sale of shares (in case of all non-compliant stock option plans).

If now, the FBT is abolished indeed, it would also be appropriate if some clarity or sense of direction is provided especially on the manner of taxation in the hands of the individuals. For this purpose, it may be a good idea to take a clue from the clarifications/ circulars issued by the CBDT on this subject matter to ���settle��� the taxation principles.

One additional matter which may also be relevant to note in case of stock options given the manner in which the proposed law is worded presently is that the employee would need to pay taxes at the time of allotment of shares itself, resulting in a ���out of cash��� situation at that point of time. Accordingly, he may be compelled to sell out some of his share entitlements immediately to pay up the taxes, which may again go against the very principle of rewarding the employee with participation in the employer company���s shares. The Revenue may well consider this genuine difficulty and consider providing appropriate relief in the matter. Further, in case of internationally mobile employees, now there would be lesser issues in enabling them to claim the credit for taxes paid in India on such stock option benefits.

Given the above, will the move of abolishing FBT benefit anyone? The answer is certainly in the positive and the move is to favour the employers. With FBT gone, the administrative burden to comply with the law (quarterly payment of advance FBT after estimation of yearly fringe benefits, filing annual FBT return, facing separate assessment proceedings for FBT, etc) for the employer would go away completely. The employer cash flow would also be positively impacted, not only on account of there being no requirement to pay FBT on a quarterly basis, but also on account of no taxes required to be paid anymore on some collective benefits/ non-employee related benefits presently subject to FBT.

In this background, it is also important to bear in mind that it is still very early days for this matter, and more clarity would emerge when the taxmen would clarify upon a host of issues, some of which are briefly listed below-

��� Corporate employers must have been already paid the first installment of advance FBT in June 2009 ��� what would happen to that? Would the government choose to refund the same or adjust against corporate���s income-tax liability?

��� What kind of relaxations would be granted to the employers for not complying with the provisions for deducting tax on the perquisites from the employees for the prior months?

��� In addition to the stock option and approved superannuation contribution benefits, which other benefits would be taxed in the hands of the employees?

��� What would be the manner/ method of valuation of such benefits to be taxed as a perquisite?

��� Whether the clarifications issued for FBT on stock options be applied even henceforth?

In a nutshell, while the Finance Minister has done well to earn accolades from the employer by abolishing FBT, it seems that he has taken away quite a lot away from the salaried taxpayers by levying tax on perquisites.

(The author is a senior tax professional with Ernst & Young)