Way back on September 25, 2000, Rule 3 governing perquisites (perks) was amended by Notification SO 940(E). The major change brought in was taxing on a ‘cost to employer’ basis, thereby giving perks the colour and character of salary. This in turn resulted in many employers increasing the salary of the employee instead of granting perks, thereby avoiding the requirement to maintain cumbersome records.

Later, it was found that it is more beneficial and efficient for the revenue to collect the perk tax directly from the employers. Moreover, part personal and part business expenditure — normally witnessed in the case of motor cars, credit cards and entertainment at clubs — required maintenance of records bifurcating the personal and official usage. This was a cumbersome exercise, subjective in nature and difficult to verify for the revenue.

Therefore, Finance Act (FA) 2005 introduced a brand new type of tax called fringe benefits tax (FBT) to be paid entirely by the employer, not only on such mixed perquisites, but some other items of expenditure also.

Corresponding perks which were taxed in the hands of the employees were deleted by Notification 68/2005 dated February 28, 2005, issued immediately after the Budget was presented by P Chidambaram to the Parliament. Corresponding rules taxing perks in the hands of the employees were also duly deleted.

As per Section 115W, FBT was applicable only where the employer was a company, a firm, an association of persons (AoP) or body of individuals (BoI), a local authority and an artificial judicial person. In other words, FBT was not applicable to an employer who was an individual, HUF, any fund or trust etc.

To bring the employees of such employers in the tax net, all the above deleted sub-sections of Rule 3 were reintroduced with effect from FY08 by Notification SO 1896(E) dated November 7, 2007, with a provision that these would be applicable only to an employee whose employer is not liable to pay FBT.

In other words, either employers paid FBT, or for those who were exempted from FBT, their employees had to cough up the perk tax.Moving ahead, the revenue once again realised that FBT imposes considerable compliance burden both on the employers as well as employees. Therefore, FA 2009 abolished FBT by deleting Chapter XII-H!

Rule 3 was still in its place. This meant that beginning FY10, all employees, irrespective of the type of the employer, were to be taxed on perks. FA 2009 also introduced two new items in Section 17 which defines perks –

(i) Contribution to superannuation fund of the employee in excess of Rs 1 lakh during the year; and

(ii) Employee stock option plans It was necessary for CBDT to issue a notification redefining the various provisions soon after FBT was abolished. This resulted in employers so far during the financial year not deducting tax at source on the related perks. Finally, CBDT has now issued Notification 94/2009/F. No. 142/ 25/2009-50(TPL) dated December 18, 2009, with minor (but not desirable) modifications in Rule 3. Understandably, this is effective from April 1, 2009.

Note carefully that the erstwhile FBT was charged on a percentage varying between 5% and 50% of the expenses incurred by the employer. Now, the employee will be charged tax on ‘cost to employer’ basis. So basically, we are back to square one.

Moreover, this delay in issue of the notification has resulted in employers being forced to apply TDS on perks for the whole year, during the next three months, causing hardships and liquidity problems to the affected employees.

As observed earlier, Section 17 defining perks has defined contribution to superannuation fund of over Rs 1 lakh as perks. Several employers have conveniently increased the salary of such employees by the amount of this excess, thereby restricting the contribution at Rs 1 lakh only.

All that I hope for at this stage is that this is positively the last time when the tax provisions related with perk values get tinkered. In any case, at this particular juncture, I wonder how any employer is going to apply TDS on employees who have resigned and left the organisation.

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