Employees enjoying perks such as chauffeur-driven cars, rent-free accommodation, club memberships, credit cards and meal vouchers could find the next four months a little too harsh on their wallets as they may have to cough up the entire annual tax on such benefits during this period.
he government is set to announce the norms for taxation of fringe benefits that have become taxable in the hands of employees after a change effected in the 2009-10 Budget, a finance ministry official. The norms will detail how the perks will be taxed and what benefits will come under the tax net. In the absence of guidelines, most companies are yet to start deducting tax on fringe benefits. Therefore, the tax burden for the entire financial year from April 1, 2009 will be distributed over the remaining four months, that too, if apex tax agency Central Board of Direct Taxes (CBDT) allows companies to do so. This would mean lower net salaries in the remaining months of the current financial year for employees enjoying such benefits. If the apex direct tax body fails to make such a provision, employers will have to deduct the amount in the month the rules become effective.
The July 2009 Budget dropped FBT and returned the earlier system of taxing perks in the hands of the employee. Now, the value of the perk specified by CBDT will be added to an employee’s income and taxed accordingly. For example, as per the earlier perquisite taxation rules that were in effect before FBT was introduced, the value assigned to an 800-cc car was Rs 1,200. This value of Rs 1,200 was added to a taxpayer’s total income in the year and taxed accordingly. “Since perks are fully consumed and have no savings element, any tax burden on them will have to come out of disposable income. Any major departure from the pre-FBT rules would create an enormous burden for the salaried class,” said Amitabh Singh, partner at consultancy firm Ernst & Young. Employees of those companies that had already started deducting tax on these benefits as per the old rules, which were in effect before the controversial FBT was introduced in 2005, would not be hit as hard as they would have paid some tax.
However, as the overall liability is likely to be more due to the government’s plan of bringing more benefits under the tax net, they too will have to shell out additional amounts. “Many companies have been deferring the decision on taxation of the perquisites. Now, as the financial year-end is approaching, companies are proposing to use the existing rules that were applicable prior to the withdrawal of FBT and finalise tax computations,” said Vikas Vasal, partner at KPMG. In the perks taxation regime before FBT, perquisites that were taxed included rent-free accommodation, car, chauffeur, services of personal attendants, concessional education, concessional journeys, credit card, interest-free loans, gift vouchers, hotel stay exceeding 15 days and medical facilities. The value of these services was the actual cost to the employer. The Finance Act 2009-10 also made employee stock options and employers’ contribution to the superannuation fund taxable, if the amount exceeded Rs 1 lakh per annum. Total FBT collections in 2008-09 stood at Rs 7,997 crore.