Time the govt cleared the air on taxation of fringe benefits

Despite CBDT clarifications, ambiguities on the scheme provisions continue

Comment
Krishan Malhotra

Fringe benefit tax (FBT) was introduced by the Finance Act, 2005 with the stated intent of bringing the benefits collectively enjoyed by employees under the tax net.
There has been a great deal of confusion on FBT since its introduction.

In fact, clarifications issued by the Central Board of Direct Taxes (Circular no. 8 of 2005) in a bid to remove the doubts whatsoever only ended up making it more confusing.

The present scheme may be revisited in the upcoming Budget to address certain deviations from the stated intent and to remove some ambiguities in the provisions.
FBT on ESOPs

The Finance Act 2007 changed the taxation of employee stock option plans (ESOPs) granted by the employer to employees by levying FBT on the employer.

Efforts have been made to remove ambiguities in the levy of FBT on ESOPs by way of introduction of Valuation Rules (Rule 40C), and clarifications vide CBDT circular No. 9/ 2007.

However, the following suggestions may also be considered and addressed:
For valuation of unlisted securities, experts other than category I merchant bankers registered with Sebi should also be specified;

Valuation of securities listed in overseas stock exchanges (as per the circular, such securities shall be treated as unlisted securities, with value to be determined by merchant bankers) may be aligned with the method prescribed for securities listed in Indian stock exchanges by notifying recognised stock exchanges overseas;

In the case of expatriate employees, section 115WKA entitles the employer to recover the FBT paid by it on ESOPs from the employee. The circular clarifies that such recovery may be regarded as tax paid by the employee on ESOPs. It also suggests that employee may claim credit against tax paid on ESOPs in their home country. In order to help the employee claim such credit, a prescribed form may be notified that may be issued either by the employer or by the tax office certifying that the employee has borne the tax on ESOPs.

FBT on employers covered under presumptive tax regime

Keeping in mind the complexity of computation of income in case of certain assessees, they have been exempted from maintaining books of accounts. They are paying taxes on presumptive income basis. Applicability of FBT on such assessees (as employers) would defeat the very purpose.

However, recently, the Authority for Advance Ruling (AAR) in the case of an oil exploration company (covered under presumptive tax regime) has held that it is liable to pay FBT on transportation cost incurred in India on its expatriate employees.

This issue needs to be addressed by the government by bringing an appropriate amendment so that the employer under presumptive tax regime should not face undue hardship.

Framing of sections - double whammy

One wonderful example is the framing of sections in FBT and in salary provisions, which results in direct conflict between them, and makes both employee and employer liable to pay income tax and FBT on certain sets of fringe benefits.

Section 115WB(3) excludes those fringe benefits on which taxes have been paid by the employee from the ambit of FBT. Sub-section (3) excludes transport facility provided by employer to its employees from their residence to the office and back.

However, as interpreted by the AAR, exclusions of sub-section (3) are limited only to sub-section (1), which covers inter alia superannuation and ESOPs only. Consequently, as many as 17 heads of expenses, covered under sub-section (2), which inter alia include conveyance and repair, running (including fuel) and maintenance of motor cars, remains unaffected by such exclusions.

Thus, exclusion of transport facility to employees in sub-section (3) may not be availed by the employer at all, since it may be covered under sub-section (2) as conveyance or running - maintenance of motor cars.

Further, other fringe benefits, covered under sub-section (2), shall be liable to FBT in the hands of the employer even if taxes have also been paid by the employee thereon, resulting in a double whammy.

This anomaly needs to be addressed in the coming budget by extending the scope of exclusions of sub-section (3) to sub-section (2) also.

Another example is section 17(2), which covers perquisites for the purpose of taxation in the hands of the employee. It has some clauses like (iii), (iv) and (vi), which directly or indirectly cover most of the fringe benefits (covered under FBT) in their ambit.

Clause (vi) specifically excludes fringe benefits, which are covered under FBT, but clause (iii) and (iv) do not have such specific exclusion. This leads to confusion that certain fringe benefits, even if an employer is paying FBT thereon, may also be taxable in the hands of employees.

There needs an amendment in section 17(2) to exclude all fringe benefits on which employer is paying FBT from further taxation.

The writer is executive director, PricewaterhouseCoopers.