The Central Board of Direct Taxes (CBDT) had issued circular number 9, dated 20th December, 2007, clarifying therein certain issues relating to levy of FBT on ESOPs. One of the clarifications was that if FBT on account of share allotted or transferred under ESOPs has been paid by the employer, but recovered from an employee, it shall be deemed that the employee has paid the FBT. Therefore, such an employee can claim credit for this deemed payment of FBT in a foreign country.

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Representations were received from taxpayers suggesting that this clarification should be incorporated in the Income-tax Act so as to provide a firm basis to enable the employees to claim credit for tax so paid. Since this demand is consistent with the clarification issued by the CBDT earlier, and does not have any adverse impact on revenues, a new section 115WKB has been inserted. This section provides that where fringe benefit tax (with respect to allotment or transfer of specified security or sweat equity shares) has been paid by the employer and subsequently recovered from the employee, the recovery of fringe benefit tax shall be deemed to be the tax paid by such employee in relation to value of fringe benefits provided to him. The deeming provision shall apply only to the extent to which the amount of recovery relates to the value of the fringe benefits provided to such employee.

The new section further seeks to provide that, not withstanding anything contained in this Act, in the above situation, the employee shall not be entitled for any refund out of such deemed payment of tax. The employee shall also not be entitled to claim any credit of such deemed payment of tax against tax liability on other income or against any other tax liability. For example if an employer has recovered Rs 1000 as FBT on ESOPs allotted to him; it will be deemed that the employee has paid Rs 1000 as tax on perquisite value of ESOPs allotted to him. This deemed payment of Rs 1000/- will be taken as the payment against tax liability on perquisite value of ESOPs allotted to him, if it were to be taxed in his hand. However, if the tax on the perquisite value of ESOPs, if it were to be taxed in his hand, is less than Rs 1000 (say 900); then the employee will neither be entitled for a refund of Rs 100; nor this amount will be allowed to be credited against tax liability on other income or against any other tax liability.

Applicability – This amendment has been made applicable with effect from 1st April, 2008 and shall accordingly apply in relation to assessment year 2008-09 and subsequent assessment years.

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