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Deficiencies in employee perquisite valuation
December, 30th 2009

The perquisite valuation rules finally arrived on December 21 after a long wait. Presumably, the Central Board of Direct Taxes (CBDT) was pre-occupied with drafting the Direct Taxes Code while India Inc lived without a guidance on how to deduct tax at source.

The fringe benefit tax (FBT) was strongly opposed by India Inc, but there is no doubt that it was beneficial to the employees they did not have to directly bear the tax on many perquisites. The repeal of FBT meant uncertainity on taxation of perks. Thankfully, there are few changes to the valuation rules when compared to the rules that existed prior to the introduction of FBT.

Rule 2BB, which deals with taxability of allowances, remains unchanged. If we take an overall view on employee benefits and allowances, a few items merit attention and this article will discuss them with the hope that they will be taken note of.

The taxable values for provision of an automobile including the cost of its running and maintenance, and driver is nil if the car is used purely for official purpose. However, if the employer allows mixed use, the rule provides for deemed values towards personal use.

These values have raised by 50% (there is also an apparent typo in one clause that may be rectified soon). Given that the earlier values were set many years ago, an enhancement of the limit accounting for the increase in fuel prices is justified.

However, price increase is not limited to fuel only, prices have increased on many other household expenditure as well such as school fees, food, local transportation etc for which the exemption limits have not been raised. The exemption for transport allowance under Rule 2BB remains unchanged at Rs 800 per month although the limits for this allowance was raised by the Sixth Pay Commission (SPC) or government employees. A 50% increase is merited here as well.

Education allowance for children continues to be a measly Rs 100 per month while the entitlement under the SPC is a princely Rs 1,000 per month with an additional Rs 3,000 per month as hostel subsidy. With education being a key concern, a higher limits would be welcome.

Now consider the case of meals provided by an employer during working hours. This is a benefit that is statutorily provided to factory workers and generally provided in many other establishments as well. There are enough studies that show the positive co-relation between wholesome meals and worker productivity and, during the FBT regime, the entire expenses were exempted.

Sadly, the old limit of Rs 50 per meal, set eight years ago, is now back. With food prices surging, what kind of meal would Rs 50 fetch at a restaurant or cafeteria in cities where most of the employee population resides? If a limit is required to prevent misuse, a cap of Rs 100-125 per meal would be reasonable without adversely impacting the governments coffers.

Prior to the introduction of FBT, employee share plans were taxed as perquisites unless the share plans conformed to a set of prescribed guidelines. This allowed employees to defer their taxation to the point when they actually sold the shares and realised gains.

With the phaseout of FBT, share plans are again taxable in the employees hands but without the earlier shelter of deferment. This means the employees will now be subject to tax on the date of exercise (in the case of stock options) even if he does not have the liquidity to pay the tax.

Share plans generally have an expiry date and employees cannot defer the exercise indefinitely. Employees will thus be forced to simultaneously exercise and sell shares to generate funds to pay the tax. Employees of unlisted companies would face a bigger problem as they cannot sell these shares.

The prescribed valuation methodology is a rehash of what was prescribed under FBT, and again seems to ignore the fact that many employee share plans are not stock options and do not have an exercise event. It would be better to reinstate the earlier scheme of exempting share plans that conform to prescribed guidelines.

Other provisions like credit cards and club memberships require the employer to maintain precise details and there could be difficulty in getting that after nine months.

The government has also not clarified what should be done with FBT that has been paid in advance. Companies should immediately file for refund, as this tax is no longer collectible under law but some clear guidelines would clear the air on this issue. In summary, the perquisite rules are welcome and I hope some of the remaining issues are dealt with expeditiously.

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