The salaried class, reeling under the inflationary pressures, has suffered yet another setback this holiday season with the announcement of new perquisite valuation rules by the Central Board of Direct Taxes (CBDT) on December 18. The new rules have come in the wake of the abolishment of fringe benefit tax (FBT) by finance minister Pranab Mukherjee in this year’s Budget and will be applicable retrospectively from April 1, 2009.

The long gestation period of five and a half months had raised hopes that some relief was in the offing. However, belying those expectations, the new perquisite rules have turned out to be a replica of the old, save for some changes in valuation norms for car and driver, stock options and accommodation provided to central/state government employees on deputation to any body/ undertaking under the control of such government.

Given the retrospective nature of such rules, the entire tax liability is set to be recovered in the balance months (December, 2009 to March, 2010), in case the employers have not withheld tax so far on the perquisites, which were earlier covered under the ambit of FBT. Consequently, this would leave the employees reeling under a cash crunch situation.

One of the key amendments has been in the taxability of car and driver facility provided by the employer. Motor car used for official purpose continues to be tax-free. Similarly, there is no change in valuation norms for motor car owned by the employer and provided to the employee exclusively for personal purposes.

The change in valuation norm has been made for cases where motor car and driver are provided by an employer for official and personal purposes, which has essentially increased by 50%; however, the taxability in such cases, considering the expenditure that may be incurred towards this facility, still remains nominal.

Similarly, the relief for use of employee-owned cars for official and personal purposes has been increased by 50%, resulting only in a marginal relief to the employees. The rule for valuation of accommodation is a replica of the erstwhile rule, except that central/ state government employees who are on deputation with any body/undertaking under the control of such government may stand to lose since it would not be treated on par with valuation of accommodation for regular government employees.

Another significant disappointment has been in the category of meal coupons provided by an employer to its employees. The tax-free limit in such cases remains unchanged at Rs 50 per meal per day, whereas under the FBT regime, this limit stood at Rs 100 per day. In view of the present inflationary conditions, it was expected that the government would provide some relief towards this component by raising the limit to an acceptable level.

It’s the same for stock options. The Finance (No 2) Act, 2009, reintroduced stock incentives as ‘perquisite’ in the hands of employees. The valuation rules were eagerly awaited. The new rules, however, are a replica of the FBT rules for valuation of stock options. The only change is that the value of benefit is to be computed at the time of ‘exercise’ of the options under the new rules, rather than ‘vesting’ under the erstwhile FBT regime.

It is pertinent to note that under the FBT regime, the government had come out with clarifications in relation to attribution of benefit on account of stock options for expatriates. However, no such clarification has been provided in the new rules.

A significant benefit, however, is tax exemption in case of use of telephone (including mobile phone), which was earlier liable to FBT. This should bring some cheer to the salaried class.

On an overall analysis, the abolition of FBT brought much awaited and anticipated reprieve to the corporate sector, reeling under the additional cost and compliance burden imposed on it.

While this has certainly resulted in cost savings for employers, the tax cost burden for the employees has shot up substantially. The much expected relief for the salaried taxpayer through concessions in valuation of perquisites has not been given.

Hopefully, the proposed Direct Taxes Code will consider the plight of the salaried taxpayers and bring some relief to the salaried tax payers. Until such time, employers would need to revisit their employee compensation packages to align the same with the new rules.

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February 2024