FBT Perks vs Fbt

8/7/2019 FBT Perks vs Fbt

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FBT Perquisites vs. Fringe Benefits1. Pre FBT position

1. Section 15 of the Income tax Act creates a charge of income tax on anincome under the head Salaries

.Section

17defines salary for thepurposes of s.15 to inter alia include perquisites or profit in lieu of

salary videclause (iv) of sub-section (1). These terms, namelyperquisites and profit in lieu of salary are defined by sub-sections (2)and (3), respectively.Sub-section (2) provides a list of various itemsof provisions and expenditure by theemployer which areregarded asthe perquisites for the purposes of s.15. Further, the value of anyother benefit or amenity as may be prescribed is also treated as aperquisite videclause (vi) of the said sub-section. Rule 3 of theIncome tax rules provide for the valuation of such perquisites.

2. The sum and substance of the position, so far, was that the perquisiteswere includible in computing income under the head Salaries and

were taxable in the hands ofemployees. The amount that was to beincluded in such computation was either determined by the prescribedrules or by the market valuation thereof. Theexpenditure incurred bytheemployer on provision of perquisites was allowable as deduction inthe hands of theemployer in computing his income.

3. Scope of the perquisite was so vast that almost every benefit oramenity provided to theemployee was taxable in his hands at marketvalue or at prescribed value, unless the same was specificallyexempted by law or by notification. However, in cases where thebenefit or amenity was collectivelyenjoyed by theemployees therewas difficulty in attributing thequantum of benefit to individualemployees for the purposes of taxation in their hands.Similarly,difficulties were faced by therevenue authorities in bringing to tax aperquisite in the hands of an employee where theexpenditure onbenefit or amenity was incurred for the business purposes and whereincidentally thebenefit was believed to beenjoyed by theemployee.

2. Post FBT position A paradigm shift1. The Finance Act, 2005 has effected a paradigm shift in taxation of

perquisites resulting in to taxation in the hands of the provider ofperquisite and not therecipient of such perquisite. The one whoreceives the benefit; the income is spared and the one who spends;incurs theexpenditure is taxed for having spent. Introduction of FBT

has theeffect of shifting a substantial tax liability from employees, asa class, to theemployers. Government employees, including theproverbial draftsmen, are the biggest beneficiaries. Perhaps that is theperquisite ofrunning a government.

2. New Chapter XII H creates a charge for payment of FBT on thespecified employers. FBs, now chargeable in the hands ofemployers,will not bechargeable in the hands of theemployees. Those


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perquisites hitherto taxable in the hands of theemployees will nolonger be taxable in their hands provided the same arechargeable asthe FBs in the hands of theemployers.

3. Perquisites which are specifically included in Chapter XII H, whether asthe Fringe Benefits or as the Deemed Fringe Benefits will now betaxable in the hands of theemployers alone. Theclass, type and kindof such FBs and therules of theircomputation and taxation arediscussed in detail in otherchapters of this Special Story and thereaders arerequested to refer to the same for thecompleteunderstanding of the discussion herein.

4. To giveeffect to the intention of not taxing the specified perquisites inthe hands of theemployees, the valuation rules are amended videnotification No. 68/2005 dated 28th February, 2005, whereby thefollowing sub-rules have been withdrawn with effect from 1st April,2005;

a. Rule 3(2) relating to valuation of motorcar perquisite,b. Rule 3(6) relating to free orconcessional journey to transportemployees,c. Rules 3(7)(ii) to 3(7)(vi) relating to value of travelling, free

meals, gift, credit cards, club facility, andd. Rule 3(8) relating to valuation of any other benefit.

5. Theeffect of the abovereferred withdrawal is that now no rules ofvaluation are available for valuing such perquisites and as the sameare specifically included in Chapter XII H, they will not beconsidered incomputing the income under the head salaries. Accordingly, use ofmotorcar, free orconcessional journey to transport employees, valueof travelling, free meals, gifts, credit cards, club facility, andimportantly any other benefit not specified by the Act or Rules will not

be taxed as a perquisite in the hands of theemployees.

3. Status quoStatus quo is maintained for the below mentioned perquisites and allowances.They shall not be liable to the Fringe Benefit Tax and instead shall continue tobe taxable in the hands of theemployees alone. These benefits continue to beconsidered as perquisites in the hands of theemployees subject to exemptionorconcession, if any, in respect of such perquisites.

a. Rent free orconcessional accommodationb. Transport facilityc. Reimbursement of medical expenses (in view of proviso to Section

17(2)

.d. Interest free orconcessional loan

e. Supply ofgas, power or water for household consumptionf. Use ofcell phoneg. Use or transfer of movable assets at concessional ratesh. Houserent allowancei. Leave travel assistance/allowance/concessionj. Transport allowancek. Any other allowance


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4. Beneficial to employees

Other things remaining the same, the FBT lowers the tax liability in the handsof theemployees and as a result ensures higher take home for them. The

liability stands shifted o theemployers who mayrealign the salary structuresto neutralise theeffect of the amendment.

5. Provisions to avoid double taxation0. The value of any other fringe benefit or amenity, excluding the

fringe benefits chargeable to tax under Chapter XII H, as maybe prescribed will continue to be taxed in the hands of theemployees.Clause (vi) of section 17(2) has been amended with the intention toprovide for mutual exclusion. Those benefits or amenities, taxable inthe hands of theemployers, will not be included in the income of theemployees.Likewise, section 115WB(3) provides that privilege,service, facility or amenity does not include perquisites in respect of

which tax is paid or payable by theemployees. Accordingly aprescribed fringe benefit, included in the income of theemployee, inview of the provisions of the section 17(2), is not liable for the FringeBenefit Tax. Benefit on which tax is paid or payable by theemployeescannot be taxed as fringe benefits in the hands of theemployer in viewof section 115WB(3).

1. These provisions are introduced with the apparent intention ofavoiding double taxation and to provide for mutual exclusion.However, the use of different terminologies, in these provisions,present thecase of an avoidableconfusion.S.17(2)(vi) uses the termchargeable by providing that the FBs chargeable to tax under

Chapter XII H will beexcluded in computing the income under thehead Salaries. As against the above, s.115WB(3) excludes suchperquisites in respect of which tax is paid or payable by theemployee. Two different tests are applied at two different places toachieve the same objective. Forexclusion in the hands of theemployee, it will have to be shown that the benefit in question waschargeable in the hands of theemployer, whether actuallycharged ornot, while, forexclusion in the hands of theemployer, it will have tobe shown that the tax is paid (or payable) on the benefit, by theemployee.

2. The doubt assumes relevance in cases where a particular benefit,otherwisechargeable in the hands of an employee, is not actually

taxed due to an exemption specificallyenjoyed in respect of suchbenefit or a part thereof is not taxed due to the partial exemptionenjoyed by such benefit.

6. Effect of amendment in rulesBesides the amendments in rules discussed earlier, two things requireattention. One, the value of benefit in case ofrent free accommodation is now


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to be taken at 20% (10% before amendment) of salary in cities havingpopulation exceeding 4 lakh and 15% (7.5% before amendment) in othercases.Second, the notification, for some strangereasons, is madeeffectivefrom 1st April, 2005 and shall apply for assessment year 2005-06 , andonwards while the Fringe Benefit Tax is introduced w.e.f. assessment year2006-07.

7. Allowances exempt perquisites and FBT0. An allowance being in the nature of a profit in lieu of salary, includible

in the hands of theemployee in computing the income under the headSalaries, should not be taxed under Chapter XII H to the Fringebenefit Tax. The specific provision ofs.115WB(3) howeverrestricts the scope ofexclusions to perquisitesbut not profit in lieu of salary. A clarification will be welcome to putthe issue beyond anyrealm of doubts. The allowances including thefollowing shall continue to be taxed in the hands of theemployees andshall beeligible for theexemption, where provided.:

i. Leave Travel Assistance Section 10(5), r.w.r. 2Bii. House Rent Allowance Section 10(13A), r.w.r. 2Aiii. Conveyance Allowance Section 10(14)(i), r.w.r. 2BB(1)iv. Transport Allowance Section 10(14)(ii), r.w.r. 2BB(2)v. Expenditure on medical treatment Proviso Section 17(2)(vi),

r.w.r. 3Avi. Transport services for workers and staff Explanation to S.

17(2)(iii)The use of any vehicle for journey by the assessee from hisresidence, to office or other place of work, or from such officeor place to his residence, is not regarded as a benefit oramenitygranted or provided to him free ofcost or at aconcessional rate, by virtue ofs.17(2)(iii). Accordingly, theexpenditure on transport or

commutation between office and residence has been specificallyexempted from income-tax. No amendment has taken place inrespect of this provision. The Finance Bill, 2005, whileintroducing the Chapter XII H had specifically provided thatprovision of such transport shall not beregarded as the FringeBenefit for the purposes of Chapter XIIH, however, whileenacting the bill, the absence of this provision is conspicuous.This however does not alter theexisting provision wherein suchtransport facility will beexempt in the hands of theemployeeby virtue ofs.17(2)(iii). As regards, theemployer, therelevant part of theFinance Ministers speech, 273 ITR (St.) p.56, may help:

However, transport services forworkers and staff and canteenservices in office or factorywill be outside the tax net. TheFinance Minister has reiterated his desire while moving theamendments to the Finance Bill, 2005, on 5-5-2005, 145Taxman (St.) p. 30 :

We have excluded a numberof benefits which accrue tous. For


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example, canteen expenditure has been excluded, transportand travelling has been excluded.

vii. Medical benefits and allowancesProviso to s

.

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(2) grants a specificexemption, in differentcircumstances, to an employee from tax in respect of anexpenditure incurred by theemployer on the medical treatmentof an employee or his family members, subject to theprescribed conditions and limits. These provisions will continueo enable an employee to claim relief from tax where the sameis sought to be taxed in his hands. As regards, theemployer,he mayrely on s.115WB(3) to claim exclusion from FringeBenefit Tax on theground that such a perquisite is the one inrespect of which the tax is payable by theemployee but is notpaid on account of specificreliefconferred on him.

8. General Rule 3(8) deleted0. Rule 3(8), deleted w.e.f1-4-2005, provided that the value of any

other benefit, or amenity, service, right or privilege provided by theemployer shall be determined on the basis ofcost to theemployerunder an arms length transaction as reduced by theemployeescontribution, if any. The said rule further provided that theexpenseson telephone including mobile will not becovered by the aboverule.

1. Theeffect of this amendment, in the hands ofemployee, is that aperquisite not specifically made taxable, will not be taxable in hishands. Theexpenditure on telephone is now specifically made liable tothe Fringe Benefit Tax in the hands of theemployer.

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FBT Perks vs Fbt