Valuation of perquisites / fringe benefits after abolition of FBT

A query regarding the valuation of perquisites / fringe benefits after the abolition of fringe benefit tax (FBT), by the Finance (No.2) Act, 2009, has been received from a number of clients, chartered accountants and other tax-payers. As is already known to all concerned, the Finance (No.2) Act, 2009, has inserted section 115WM in the Income-Tax Act, 1961 (the Act), w.e.f.1.4.2009. As per the aforesaid newly inserted section 115WM, nothing contained in Chapter XII-H shall apply, in respect of any assessment for the assessment year (AY), commencing on 1.4.2010, or any subsequent AY. In other words, the fringe benefit tax (FBT) has been abolished from the AY 2010-11, onwards, i.e. from the financial year (FY) 2009-10, onwards.

With the abolition of FBT, a question arises as to the tax-treatment to be given to a number of perquisites / fringe benefits, which were earlier liable to FBT and therefore, not chargeable as perquisites in the hands of the employees, in view of the provisions of the erstwhile section 17(2)(vi) of the Act. In this context, it will be appropriate to refer to the erstwhile section 17(2)(vi), which is reproduced as follows :

17. For the purposes of sections 15 and 16 and of this section,—

(2) “perquisite” includes—

(vi) the value of any other fringe benefit or amenity (excluding the fringe benefits chargeable to tax under Chapter XII-H) as may be prescribed :

Now, the aforesaid clause (vi) of section 17(2) has been substituted by clauses (vi), (vii) and (viii), by the Finance (No.2) Act, 2009, with effect from 1.4.2010. After the aforesaid substitution, the provisions of the aforesaid clause (vi) have been substituted by the provisions of the newly inserted clause (viii), which is reproduced as follows :

17. For the purposes of sections 15 and 16 and of this section,—

(2)“perquisite” includes—

(viii) the value of any other fringe benefit or amenity as may be prescribed:

From the comparison between the erstwhile clause (vi) and the newly inserted clause (viii) of section 17(2), it may be seen that the value of all other fringe benefits or amenities are now chargeable to tax in the hands of the employees, because they no longer fall outside the purview of the definition of ‘Perquisite’, after the abolition of FBT.

In the light of the newly inserted clause (viii) of section 17(2), there is a general impression prevailing that the Central Board of Direct Taxes (CBDT) will prescribe new rules for the valuation of other fringe benefits or amenities and it is only thereafter, that the fringe benefits not liable to tax in the hands of the employees, in view of the erstwhile clause (vi) of section 17(2), will be chargeable to tax in their hands.

The aforesaid impression, however, does not appear to be correct. In this connection, we will have to refer to the present rule 3 of the Income-Tax Rules, 1962 (the Rules). Rule 3, as originally enacted, contained the provisions for the valuation of fifteen (15) types of perquisites, which are listed in the following Table.

Table:

Later, when the provisions for the levy of FBT on employers were introduced, with effect from 1.4.2006, (AY 2006-07), the perquisites mentioned in serial numbers (8) to (15) of the Table were omitted, with effect from AY 2006-07, for the reason that the employers had been made liable to pay FBT on these items. The outright omission of the provisions relating to the aforesaid eight (8) items in rule 3, led to a peculiar situation in the cases where certain employers were not liable to pay FBT, under the provisions relating to FBT, like individuals, HUFs, charitable institutions, etc. The perquisites / fringe benefits provided by such employers to their employees escaped the FBT net from AY 2006-07 and they could also not be brought to tax in the hands of the employees from that AY. This situation was later on rectified through the Income-Tax (Fourteenth Amendment) Rules, 2007. These rules have amended rule 3, so as to restore the provisions which were earlier omitted, only in respect of employees whose employers were not liable to pay FBT. This amendment is given prospective effect from 1.4.2008, i.e. from the AY 2008-09. As a result, for the AYs 2006-07 and 2007-08, the aforesaid eight items of perquisites / fringe benefits are not taxable in the hands of the concerned employees.

The tax-treatment of the aforesaid fifteen (15) types of perquisites / fringe benefits may be considered as follows :
1. Perquisites / fringe benefits, the valuation / tax-treatment of which was not affected by the levy of FBT – Part A of the Table.
The following seven (7) items of perquisites / fringe benefits were not affected by the levy of FBT on the employers :

If we examine the present provisions of rule 3 of the Rules, then it will be seen that all the aforesaid perquisites / fringe benefits have continued to be chargeable to tax in the hands of the employees, even after the levy of FBT, with effect from 1.4.2006. Thus, there is absolutely no anomaly, as regards the valuation and tax-treatment, in respect of the aforesaid perquisites / fringe benefits, for the purposes of their taxation in the hands of the employees.

2. Perquisites / fringe benefits, the valuation / tax-treatment of which was affected by the levy of FBT – Part B of the Table.
The following eight (8) items of perquisites / fringe benefits were not liable to tax in the hands of the employees, after the levy of FBT in respect thereof, in the hands of the employers :

The first item in the aforesaid list is valuation of perquisite, in respect of provision of motor-car and other conveyances under rule 3(2). If we examine the aforesaid rule 3(2), the initial part of the same reads as follows :
“(2) (A) The value of perquisite provided by way of use of motor car to an employee by an employer, who is not liable to pay fringe benefit tax under Chapter XII-H of the Act, shall be determined in accordance with the following Table, namely :—“
From the aforesaid part of rule 3(2), it may be seen that the value of ‘Perquisite’ provided by way of use of motor-car to an employee by an employer, was chargeable in his hands, if his employer was not liable to FBT.

Similarly, rule 3(6) relating to the valuation of perquisite in respect of transport facility allowed by transport undertakings, was also applicable only in the case of the employees of an employer, who was not liable to pay FBT under Chapter XII-H of the Act. Same was the position regarding the valuation of perquisites, in respect of other items, viz. holiday facilities, free food and non-alcoholic beverages, gifts on ceremonial occasions, credit card facilities, club facilities and other benefits / amenities, which are covered under rule 3(7)(ii), 3(7)(iii), 3(7)(iv), 3(7)(v), 3(7)(vi) and 3(7)(ix), respectively. It may, thus, be seen that the aforesaid parts of rule 3 were applicable only in the case of the employees of an employer, who was not chargeable to FBT under Chapter XII-H of the Act. In other words, the aforesaid parts of rule 3 were not applicable in respect of the employees, whose employer was liable to FBT.

Now that the FBT has been omitted by the Finance (No.2) Act, 2009, with effect from 1.4.2010, the exclusion of certain fringe benefits from the definition of ‘Perquisite’, in view of the levy of FBT on the employer, stands deleted. In other words, the valuation and tax-treatment of the aforesaid perquisites / fringe benefits will be governed by the respective parts of rule 3 of the Rules, after the omission of FBT, with effect from 1.4.2010.

3. Thus, there is no vacuum or lacuna regarding the valuation of the various perquisites / fringe benefits, after the omission of FBT.
If we refer to part A and part B of the aforesaid Table, then it will be seen that all the seven (7) perquisites / fringe benefits included in part A of the Table continued to be taxable in the hands of the employees, even after the levy of FBT on the employers, under Chapter XII-H of the Act.

However, as regard the perquisites / fringe benefits in part B of the Table, the same were not taxable in the hands of the employees, after the levy of FBT in respect thereof, on their employers, as per the provisions of the erstwhile section 17(2)(vi) of the Act.

Now that the FBT has been omitted by the Finance (No.2) Act, 2009, with effect from 1.4.2010, the aforesaid eight (8) items of perquisites / fringe benefits included in part B of the Table, will also be liable to tax in the hands of the employees.

Therefore, it may be seen that there is no vacuum created after the substitution of the erstwhile clause (vi) by the newly inserted clause (viii) of section 17(2), vide the Finance (No.2) Act, 2009. As a result, all the aforesaid items of perquisites / fringe benefits will be liable to tax in the hands of the employees, as per the provisions of present rule 3 of the Rules, after the omission of FBT by the Finance (No.2) Act, 2009, with effect from 1.4.2010.

However, a doubt may be raised about the validity of the aforesaid conclusion on the ground that the aforesaid clause (viii) of section 17(2) has been inserted, by the Finance (No.2) Act, 2009 and therefore, the rule for the valuation of any other fringe benefit or amenity as referred to, in the newly inserted clause (viii) of section 17(2), will have to be prescribed afresh. Besides, there is an anomaly in the exemption of meal vouchers, as regards conditions of exemption of expenditure on meal vouchers, etc., from FBT under section 115WB(2)(B), vis-à-vis the conditions for exemption of meal vouchers from tax under rule 3(7)(iii) of the Rules. This anomaly will lead to lot of hardship for companies engaged in the business of meal vouchers, etc.

Notwithstanding the aforesaid contrary view, I am of the view that after the omission of FBT by the Finance (No.2) Act, 2009, with effect from 1.4.2010, the perquisites / fringe benefits listed in part B of the Table will also be liable to tax in the hands of the employees.

4. Conclusion
In the light of the aforesaid discussion, it may be safely concluded that after the omission of FBT by the Finance (No.2) Act, 2009, all the perquisites / fringe benefits as listed in the aforesaid Table, will be liable to tax in the hands of the employees, as per the provisions of the present rule 3 of the Rules.

It may, however, be added here that the provisions in respect of the valuation of a number of perquisites / fringe benefits, as per the present rule 3, may have to be amended, in order to bring them in conformity with the present business scenario and market conditions.

It is, therefore, advised that all the employers should follow the present rule 3 of the Rules, in order to compute the value of various perquisites in the hands of their employees, for the purpose of deduction of tax at source, under section 192 of the Act.

Author Details-

Mr. S. K. TYAGI, M.Sc., LL.B., Advocate, Ex-Indian Revenue Service and Income-Tax Advisor

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