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| Govt restores FBT burden on employees; cos to save on crores tax, admin hassles | |
| BS Reporters / Mumbai/bangalore/new Delhi July 08, 2009, 20:47 IST | |
The proposed abolition of the fringe benefit tax (FBT) in the Union Budget 2009-10 is expected to help companies reduce their tax burden by crores of rupees and offset much of the burden from the 5 percentage points increase in the minimum alternate tax (MAT). Most companies, however, are more thrilled that it would save them from the tedious administrative process of maintaining a database of fringe benefits.
However, the FBT -- which, till date, was being paid by companies for fringe benefits such as employee stock options (ESOPs), sweat equity or superannuation funds, telephone, conveyance, club memberships and car allowance -- will now be paid by the employees directly. This was the case earlier too -- prior to FBT being introduced in 2007. Experts are awaiting the draft of the new tax code to determine the extent of the tax burden on employees.
Among the several incidences of FBT, ESOPs and the superannuation fund attract the highest tax rate. Individuals might have to shell out 30 per cent tax on ESOPs. In the case of superannuation contribution by a company beyond Rs 1 lakh, the entire amount is taxed at the rate of 33.9 per cent, including cess and surcharge. However, the burden is lower in case of expenditure incurred by way of gifts to employees or scholarships to employees' children and conveyance and telephone expenses.
It's estimated that the government earns a little over Rs 10,000 crore from FBT alone. So the savings for firms are substantial. Consider this. On an average, Infosys spends about to $1 million (close to Rs 5 crore) in a quarter towards FBT. So the company can incur a saving of Rs 20 crore a year with the abolition of the tax. Infosys, however, stopped giving ESOPs to employees almost 5-6 years back. So the provision to include ESOPs under perquisite tax will not make any difference for the Infy employees. Besides, Infosys contributes up to Rs 1 lakh per employee towards superannuation funds of employees beyond a certain years of experience.
FBT for India’s largest IT firm Tata Consultancy Services (TCS) for the year ended March 31, 2009 was Rs 23 crore. Wipro, too, is estimated to shell out around Rs 20 crore annually on FBT.
However, the administrative hassle was greater say companies. "The financial impact due to the abolition of FBT is not very big, but in terms of administrative hassle this is very big," said V Balakrishnan, chief financial officer of Infosys Technologies, India's second largest software exporter."
"It's not benefit much financially per say, but it's more of an administrative hassle which is gone now with the abolition of FBT. The actual financial benefit is very small", concurred Rajendra Shreemal, VP and Corporate Treasurer, Wipro. He agreed that the employees will now pay taxes for most of the fringe benefits they were getting as part of their perks.
R Chandrasekaran, President and Managing Director, Global Delivery, Cognizant, too welcomed the abolition of FBT "since the administrative hassle involved was very high".
“Most companies pass on the burden of FBT to the employees, thus the abolishing of FBT is a positive move from an employee standpoint. However, it seems the ESOPs will now be taxed as perquisites which is a negative as far as employees are concerned but it does resolve certain issues with relation to double taxation in case of expatriate employees,” said Alok Misra, CFO WNS Global Services. But Farid Kazim, CFO Mastek feels that sale of shares would anyway will be liable for tax, as they are short-term gains.
“The abolition of FBT is nothing but change of incidence as to who will be paying the tax. Earlier it was the employer who was paying it and now it is the employee. I don’t think this is in anyway attractive for employees. Add to this individuals will be taxed for even the superannuation fund,” asserted Sudhir Kapadia, partner Ernst and Young.
Neeru Ahuja, tax partner at Deloitte India, added that the government may have to consider giving ESOPs under the qualified plan which does not entail any tax when exercise the option (since no cash is given). Only capital gains tax will be levied in such cases if the employee holds the stock as a long-term proposition. Such was the case prior to FBT.
“Initially when the government announced abolition of FBT we thought it was complete abolition but it was only after reading the fine print that one realises that it certainly does not make ESOPs a attractive tool to get talent. Moreover, earlier the FBT was arrived as difference of grant price and market price on the day of listing. But now the market price considered will be the prevailing rate on the day of exit,” says Rostow Ravanan, CFO Mindtree.
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