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ShareMumbai:
One of the most significant measures of the Union Budget 2009, at least so far as corporates were concerned, was the abolition of the much disliked fringe benefit tax (FBT).
While it is true that industry in general will be celebrating the abolition of FBT, it is worth remembering that Kautilya, who was quoted by the finance minister, has also said that one man's meat is another man's poison.
In all probability, the earlier system of taxation of fringe benefits as perquisites in the hands of employees will be restored.
In short, an employer-based tax system will be converted back to employee based taxation (though the consequential amendments in Rule 3 are yet to be notified).
While it was true that FBT was anyway being passed on to employees, the effective FBT tax rate in most cases was 6.8%.
Now, these very FBT items will be added to the employee's income as perks and subject to slab rates. So, instead of having to bear a tax of 6.8%, the employee could be paying a tax of 30.9%.
For example, let's take the case of an employee who was getting some specific reimbursements as a part of his compensation package.
The reimbursements under various heads totaled to Rs. 3,60,000 per annum. The FBT liability on this amount works out to Rs. 22,922 which would be typically recovered from him by the employer leaving a net amount of Rs. 3,37,078 in the employee's hands.
(22,922 is 6.8% of 3,37,078). Now, in the new regime sans FBT, these amounts would be added to the employee's other salary income as perquisites and taxed at the slab rate applicable to him.
In the tax slab of 30.9%, such tax would work out to Rs 111,240 thereby leaving only Rs 248,760 in hand --- a difference of over Rs 88,000!
Incidentally this will also be applicable to employee stock options (Esops). Where earlier FBT was payable on Esops, now there will be perquisite tax payable. However, fortunately, in the case of Esops, employees would be indifferent between the application of FBT or the perk tax.
The reason for this is that unlike in the earlier example, where the FBT liability was @6.8%, in the case of Esops, the entire amount was subject to FBT thereby resulting in a FBT rate of 33.99% (inclusive of surcharge and cess).
Now too, the value of Esops will be subject to the marginal tax rate of the employee --- the only difference being now that surcharge has been dropped, the maximum rate will drop from 33.99% to 30.9%.
The perk tax as per the provisions of Budget 2009 will be the difference between the fair market value (FMV) of the shares on the date of exercise of the options less the exercise price.
Upon sale, capital gains tax will also be payable. Capital gains will be calculated on the difference between the sale price of the shares as reduced by the aforementioned FMV.
This is slight departure from the system followed under FBT where the fringe benefit value was the difference between the FMV on the date of vesting less the exercise price.
Consequently, the capital gain, would be the difference between the sale price and the aforementioned FMV. Another article will elaborate and amplify this point further with the use of an example and figures.
Also note that this new law shall apply only in cases where the allotment or transfer of shares from exercised options is made on or after 1.4.2009. In other words, if allotment is made prior to 1.4.09 --- the same continues to attract FBT. This is applicable even if the options are granted, vested and exercised before 1.4.09.
Incidentally, as per a clarificatory circular of the Central Board of Direct Taxes, the date of allotment means the date on which the board of directors pass the necessary resolution for making the allotment.
The writer is director, Wonderland Consultants, a tax and financial planning firm.
