Summary of rules for valuation of perquisites for Assessment year 2010-2011

This article  summarizes Notification No. 94/2009/F. No. 142/25/2009-SO(TPL) dated 18 December 2009 (Notification) issued by the Central Board of Direct Taxes (CBDT)that substitutes Rule 3 (Rule) relating to valuation of perquisites arising from employment. The new Rule is effective from 1 April 2009 and is largely similar to the erstwhile Rule. All employers, including employers who were liable to Fringe Benefits Tax (FBT) prior to its removal, will now be covered under the new Rule. They would be required to compute the taxable value of perquisites provided to the employees as per the new Rule, with effect from 1 April 2009.

Background

Prior to amendment by the Finance (No. 2) Act 2009 (FA 2009), the taxation of perquisites provided to employees was divided between FBT (i.e. taxable in the employers’ hands) and the erstwhile Rule (i.e. taxable in the employees’ hands) as follows:

(a)   Where the employers were liable for FBT, perquisites like Employee Stock Option Plans (ESOPs), contribution to approved superannuation funds, motor cars, club expenses, gifts, scholarships etc. were taxable in the hands of the employers as FBT.

(b)  Where the employers were not liable to FBT (i.e. individuals, charities, political parties etc.), the perquisites listed in (a) above continued to be taxable in the hands of their employees under the erstwhile Rule.

(c) Certain perquisites like employer-provided accommodation, provision of servant, sweeper, gardener, payment of utilities etc. continued to be taxable in the hands of the employees, in all cases.

The FA 2009, enacted on 19 August 2009, withdrew FBT and restored the taxation of perquisites on the lines of the erstwhile Rule, with effect from 1 April 2009. The erstwhile Rule, which had undergone amendments to align it with the FBT provisions, also required amendments to become fully applicable as before. The taxpayers eagerly awaited the revised Rules. After a long wait, the new Rule prescribing the revised perquisite valuation norms has been notified on 18 December 2009, with retrospective effect from 1 April 2009.

Comparative summary of changes in perquisite valuation norms

The following table summarizes the comparison between the valuation norms as they existed prior to introduction of FBT and those that have been introduced after removal of FBT:

Employer-provided accommodation

Employer-provided motor car

ⁱlf actual official use is on the higher side, the valuation can be at a lower rate provided it is demonstrated by maintaining specified documentation. (There seems to be some typographical errors in the Notification, which hopefully would be rectified soon).

ESOPs

Prior to amendment by the FA 2009, if any shares or securities were provided free of cost or at a discount to the employees, the benefit was taxable in the hands of the employers as FBT at the stage of exercise of options or allotment of shares. The taxable value of the benefit was equal to the Fair Market Value (FMV) of the said shares or securities as on the date of vesting of options, as reduced by any amount paid by/recovered from the employee.

Post amendment by the FA 2009, with effect from 1 April 2009, the aforesaid benefit is now taxable in the hands of the employees at the stage of exercise of options or allotment of shares. The stage of taxation continues to be at the stage of exercise of options or allotment of shares. However, the taxable value of the benefit is equal to the FMV of the said shares or securities as on the date of exercise of options/ allotment of shares or securities, as reduced by any amount paid by/recovered from the employee.

In other words, while the timing of taxation and the method of calculation of FMV remain the same, the calculation date of FMV has shifted from vesting to exercise.

Definition of ‘salary’ for purposes of the Rule

The definition of ‘salary’ for purposes of the erstwhile Rule did not specifically exclude terminal benefits received as lump sum payments like gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and similar payments. This created a doubt as to whether terminal benefits are to be included or not in the calculation of the taxable value of employer-provided accommodation. The revised definition of ‘salary’ in the new Rule specifically excludes the above referred benefits from its scope. Thus, in the year of termination of employment, the housing accommodation perquisite is to be computed exclusive of such benefits.

Comments

The valuation methodology prescribed in the new Rule is largely similar to the erstwhile Rule. However, the short FBT era has left some open issues that may merit consideration, some of which are listed below:

(a)   Under the FBT regime, meals provided to the employees, during working hours within office premises, were not subject to FBT and no limits were prescribed. Under the new Rule, as a carryover of the erstwhile Rule, a limit of Rs.50 per meal has been imposed.

(b)  Some companies paid the first instalment of FBT before the FA 2009 was enacted, wherein FBT was deleted. So far, there has been no indication from the Government of India on how this payment of FBT can be reclaimed by the employers.

( c) Expenses on festival celebrations were subject to FBT. However, festival celebrations do not find mention in the new Rule. It is not clear whether the same is now subject to tax as a fringe benefit under the residuary clause or exempt from tax.

(d) Employers who were hitherto liable to FBT will now need to re-compute the value of perquisites provided to the employees as per the new Rule, with effect from 1 April 2009, and recover the shortfall in tax deducted at source (TDS) from salary payment. This situation opens the following questions:

(i)    Who will now bear the shortfall in tax due to the re-computation in the cases of those employees who have already left employment before the issuance of the new Rule? In such a situation, what would be the implications on the ex-employer?

(ii)   Is the employer required to withhold the entire shortfall of taxes in the next salary payment or can he spread it over the balance part of the fiscal year?

On an overall basis, the new Rule does not present a radical shift in the taxation of perquisites, at least for the current fiscal year. At the same time, considering the emphasis the Tax Authority has placed on TDS, timely and accurate compliance to the new Rule is very important for all employers.