Perquisite valuation rules leave everyone in a tizzy
Perquisites are non-cash benefits and certain reimbursements received from the employer.
As the end of the financial year 2009-10 draws nearer, Manisha Paul, a young salaried professional, is vexed thinking as to how her employer would deal with the recently-introduced perquisite valuation rules and their corresponding tax impact on her. The Finance Act 2009 abolished Fringe Benefit Tax (FBT), only to shift the tax burden on the employees, with effect from April 1, 2009.
The Central Board of Direct Taxes (CBDT) on December 18, 2009 issued a notification (new rules) that substitutes the existing Rule 3 relating to valuation of perquisites arising from the employment. Though the new rules have recently been notified, they would apply in computing value of perquisites provided during the entire financial year 2009-10.
With the introduction of new rules, in all likelihood, a higher proportion of the income earned by the employees such as Manisha would fall under the tax net. For the salaried class, perquisites are non-cash benefits and certain reimbursements received from the employer. Residential accommodation, motor cars, credit card/club memberships, interest-free loans or loans at concessional rate of interest and stock options are some of the most common perquisites that are given by many organisations to their employees, which would now be liable to tax in the hands of the employees effective from April 1, 2009.
However, the new rules have turned out to be a replica of the old rules, prevailing before the FBT regime, except for some changes in valuation norms for accommodation provided to the Central/ the state government employees, motor car, stock option plans and so on, some of which have been explained here:
Motor Car
For the salaried professionals in the middle and top management, getting rewarded with a car may have been a much-sought after perquisite. However, under the new rules, the same may not remain true.
An increase of 50 per cent (as compared to the erstwhile valuation rules) has been provided in the valuation of an employer owned/ leased car provided to the employee for official and personal use. However, the absolute increase is a trifle when compared with the costs of owning and running a car. Small cars (with engine capacity below 1.6 litres) will now have a perquisite value of Rs 1,800 per month, while big cars (above 1.6 litres) will have a perquisite value of Rs 2,400 per month. Another Rs 900 per month will be added, if a chauffeur is also provided by the employer.
This would lead to an increase in the taxable income of the employee by Rs 32,400 per annum if he has been provided small car or Rs 39,600 in the case of a big car with chauffer. Besides, no perquisite value will be assigned if the car is used wholly and exclusively for official purposes.
The Central Board of Direct Taxes (CBDT) on December 18, 2009 issued a notification (new rules) that substitutes the existing Rule 3 relating to valuation of perquisites arising from the employment. Though the new rules have recently been notified, they would apply in computing value of perquisites provided during the entire financial year 2009-10.
With the introduction of new rules, in all likelihood, a higher proportion of the income earned by the employees such as Manisha would fall under the tax net. For the salaried class, perquisites are non-cash benefits and certain reimbursements received from the employer. Residential accommodation, motor cars, credit card/club memberships, interest-free loans or loans at concessional rate of interest and stock options are some of the most common perquisites that are given by many organisations to their employees, which would now be liable to tax in the hands of the employees effective from April 1, 2009.
However, the new rules have turned out to be a replica of the old rules, prevailing before the FBT regime, except for some changes in valuation norms for accommodation provided to the Central/ the state government employees, motor car, stock option plans and so on, some of which have been explained here:
Motor Car
For the salaried professionals in the middle and top management, getting rewarded with a car may have been a much-sought after perquisite. However, under the new rules, the same may not remain true.
An increase of 50 per cent (as compared to the erstwhile valuation rules) has been provided in the valuation of an employer owned/ leased car provided to the employee for official and personal use. However, the absolute increase is a trifle when compared with the costs of owning and running a car. Small cars (with engine capacity below 1.6 litres) will now have a perquisite value of Rs 1,800 per month, while big cars (above 1.6 litres) will have a perquisite value of Rs 2,400 per month. Another Rs 900 per month will be added, if a chauffeur is also provided by the employer.
This would lead to an increase in the taxable income of the employee by Rs 32,400 per annum if he has been provided small car or Rs 39,600 in the case of a big car with chauffer. Besides, no perquisite value will be assigned if the car is used wholly and exclusively for official purposes.
ESOP
Another very popular perk is the Employee’s Stock Option Plan (ESOP). Under the new rules, the perquisite value would be computed having regard to the fair market value of the shares/ specified security allotted or transferred to the employee on the exercise date (instead of date of vesting under the FBT regime) as reduced by the exercise price. Further, tax on ESOPs would be paid by the employee instead of the employer.
This will give rise to a practical difficulty for the employees as the difference between the market value and the exercise price is only a notional profit (as the employees would not have sold these shares). However, the new rules require the employees to pay tax on this notional profit. This may result the employees to sell their shares immediately, just to pay tax, and hence the entire rationale of providing ESOPs to participate in the growth of the company stands defeated.
To sum up, the introduction of new perquisite valuation rules could see shift in employees in lower-tax bracket to the higher-tax bracket. Further, under the new regime, with the tax levy on perquisites back on the employees, one could see alteration in certain salary components in the overall salary structure of the employees for 2010 to adjust for the said shift in the tax levy.
Further, given the retrospective nature of the rules, the entire tax liability is set to be recovered in the balance months (i.e. December 2009 to March 2009), in case the employers have not withheld tax so far on the perquisites, which were earlier covered under the ambit of FBT. Consequently, this would leave the employees reeling under a cash crash situation.
In addition to the above, there are practical issues and certain unanswered questions which the employers are now facing as the new rules are effective from April 1, 2009. We have indicated some of these as under:
1. Who will bear the shortfall in tax due to the re-computation in the case of those employees who have already left employment before the issuance of new rule? In such a situation what would be the implication on the ex-employer?
2. Is the employer required to withhold the entire shortfall of taxes in the next salary payments or can he spread it over the balance part of the fiscal year?
3. Where an employee’s cash salary is lower than the tax liability on the perquisite value determined on exercise of options under ESOPs, the employer may not be able to withheld tax to discharge the tax obligations. In such a situation, would the employers be empowered to dispose certain shares of the employees to meet the tax obligation (this may also have capital gains implication in the hands of employee)?
4. Credit cards and club membership require the employer to maintain precise details and there could be difficulty in getting that after 9 months.
Also, considering the recent emphasis the tax authorities have placed on TDS, timely and accurate compliance to the new rule is very important for all the employers.
Given the above, the employer have no choice but to deal with the above and other related issues on a practical basis considering that they have to fulfill their obligations under the Indian tax laws.
Amit Kedia & Chetan Jalan are senior tax professionals at Ernst & Young. Views expressed are personal.
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