Your tax burden has just gone up, with the government today issuing the new guidelines for taxation of perquisities. In fact, it could be a double whammy, as you have to pay the additional tax liability for the whole of this financial year over the next three months. Employees who were not paying tax on a host of perks such as company-provided cars, employee stock options, interest-free loans and salaries of gardeners and watchmen for the past five years now face an additional liability.
For instance, for an employee provided with a chauffeur-driven Honda Accord for official as well as personal use, the additional taxable income would be Rs 3,300 a month. So, the tax liability may be just about Rs 990 a month.
But, if the car is only for personal use, then the tax liability would go up. Assuming Rs 7,000 a month is spent on fuel and maintenance and another Rs 5,000 is paid to the driver, the entire Rs 12,000 would be added to the employee’s income and taxed at the applicable rate. So, for employees in the top tax bracket of 30 per cent, the liability could be around Rs 44,000 annually or a little above Rs 3,600 a month.
“This (differentiation) is primarily because it is difficult to ascertain whether the vehicle is being used for official purpose or for personal purpose,&” said Deloitte Tax Partner, Homi Mistry.
With the Fringe Benefit Tax regime, introduced by P Chidambaram during the UPA government’s last term, coming to an end in March 2009, employees getting stock options could be in for some higher burden. During the days of FBT, the burden had been transferred to employers. But now, the liability is once again on the employees.
According to the guidelines issued by the revenue department today, the difference between the fair market value on the date of exercising the option and the grant price would be added to income. So, if the grant price is Rs 100 and the fair market value on the date of exercise price is Rs 500, Rs 400 would be added to the employee’s income.
In the case of food vouchers, despite the rise in prices, the earlier tax-free limit of Rs 50 per meal remains unchanged. In case of company-paid vacations, the entire expenses would be added to an employee’s income and taxed at the applicable rate. Ditto for gifts worth over Rs 5,000.
“Employees working for firms which did not recover FBT will see a significant dip in their take-home salaries,&” said Ernst & Young Tax Partner Sanjay Grover.
With most employers not deducting tax on perquisites so far, your pay cheque for the next three months could be lighter. “This will lead to a huge deduction at source and may leave very little for the employees to take home. As a result, the employer might have to pay advances or loans to the employees, which again carries a notional interest on it,&” added Grover. Industry sources said the rate of interest on such loans to employees is 11.5 per cent.
Some tax advisors said many employees have already seen deductions. “We had advised our clients to deduct tax based on norms that existed before FBT was introduced. So, the impact will not be much,&” said KPMG Executive Director Vikas Vasal. He, however, added that in case of employees who had left the organisation, the employer would have to bear the burden.
Next year onwards, many companies are also expected to restructure the compensation package. “Now, compensation may need to be redesigned to incorporate the new exemptions or concessions that are being provided under the new prerequisites valuation rule,&” said Grover.