Web Excl: Would tax on perquisites over-burden the employee?
The Union Budget is out. Industry’s main demand of abolition of FBT has been met. Contribution to an approved Superannuation Fund exceeding Rs 1 lakh and ESOPs to employees will be now chargeable as perquisite in the hands of the employees. That there would be further impact of taxation in the hands of the employee is clear, as the ministry would now define the tax incidence on employees on account of the fringe benefits that they get from their employers.
The question that would be arising in the minds of millions of employees would be the likely impact on them from the change. Yes, they got a few sops from the Budget. The basic exemption limits were raised by Rs 10,000, giving them a net benefit of Rs 1,000. Employees drawing above Rs 10 lakh taxable salary got extra benefit due to doing away of the 10 per cent surcharge on their income tax. But would they still lose overall from the budget provisions, as the burden of taxation is passed back to them? After all, most companies had adjusted their pay packages on the basis of cost-to-company of the employee, including the Fringe Benefit Tax it had to pay. Would it be a windfall for the company at the cost of the employee?
The budget proposal would indicate that the big burden due to the change was on ESOPs and contribution to pension schemes, if one were to assume that the rest of the tax incidence were not material enough to be part of the budget proposal. Alternatively, one could gauge on the likely scenario impact by referring to the taxability on fringe benefits prescribed for companies not under FBT, as this rule served the basis for the valuation of perquisites of the employees of these companies for the last four years that FBT was in force.
Assuming that the same would be mandated for the rest of the employees after some alignment with the exemptions prescribed under FBT in recent times, such as prescribed electronic meal cards, crèches, other statutory benefits, first aid facility for employees, how would the employee fare?
The valuation of perquisite should have the same exemptions for benefits as were prescribed under FBT on the employer so that employees are not taxed in a more burdensome manner. These include valuation in respect of prescribed electronic meal cards, prepaid vouchers, and meals, crèches, other statutory obligations. Additionally, benefits that already have exemption as perquisites for employees of non-FBT companies should continue to be exempt up to the prescribed amount. This would again exclude meals through various provisions, gifts and medical reimbursement up to a certain amount among other items from being included as taxable perquisite.
However, there could still be tax incidence on account of motor car, driver, club membership, credit cards and a host of other items. Taking the sum total of the impact, the employee is likely to get burden with more tax, and this could completely override the tax advantage that the individual employee got from the budget, unless the current exemptions are continued and valuation of benefits is done to ensure no more burden on employees as was in the pre-FBT regime.
In conclusion, we see that employees are likely to face more tax burden from the transfer of tax on fringe benefits to them. It is hoped that the government would be mindful of the impact and align the rules of valuation with objective of at least maintaining the tax on benefits no more than pre FBT scenario. While framing the rules it should be borne in mind that the last rules for valuation of perquisites were defined in 2001 and inflation has been running high since then. The need to leave sufficient money in the hands of the employees to increase spending power is the need of the hour.
The author is an advocate and former member of the Income Tax Appellate Tribunal