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FBT cannot substitute liability of employees
August, 20th 2007

A client of mine pays his senior employees a quarterly bonus, a fixed sum, revised once a year. Since, this is given to all senior executives, this is taxed at 30 per cent plus SC plus cess in the hands of the employees. These employees request that the company can pay fringe benefit tax (FBT) on the bonus (which is not a contractual payment but an optional one) which is 50 per cent of the bonus, treating it as gift. They suggest that the bonus paid can be suitably readjusted taking the companys liability of FBT. This will ensure the company saving 50 per cent of tax outflow for it.

The employer is expected to deduct tax on salary amounts, including the value of perquisites given by him. As for cash bonus, it is very much part of salary. The fact that it is contractual makes no difference. When perquisite taxation was made stiff by modification of Rule 3 with effect from assessment year (AY) 2003-04, the government in response to representations came up with a concession that there would be no objection, if the tax on the element of perquisites is borne by the employer. Sec. 10(10CC) was inserted to provide for exemption of such tax so borne by the employer from being treated as further income of the employee by the Finance Act, 2002, with effect from AY 2003-04. Sec. 10(10CC) clearly mentions that this concession is available only when the tax is borne by the employer on perquisites not provided by way of monetary payment within the meaning of clause (2) of Sec. 17. Bonus payment, therefore, cannot be covered by this provision.

FBT cannot be a substitute for tax on salary payable by the employee, though what is taxable in the hands of the employee is eliminated from the scope of liability of the employer for FBT. Sec. 115WB(1) would treat only the listed direct payments for FBT, though paid directly by the employer. Bonus is not one of them. Sec. 115WB(3) provides that, where tax is paid by the employee for any of the item listed in Sec. 115WB(1), the employer is not liable for FBT. But there is no converse position exempting the employees from any liability merely because the employer has chosen to bear FBT out of his own volition. Sec. 17(2)(vi) inserted along with FBT would only exclude such fringe benefits or amenity chargeable to tax under Chapter XII-H dealing with FBT. Since bonus is not one of the items so chargeable under this Chapter, the proposal for the employer to bear FBT on the bonus amount will not spare the employees. Such a proposal is likely to backfire, so that such bonus would be made liable to tax in the hands of the employees with FBT wrongly borne by the employer not refundable, unless the assessee has time to file the revised return.

S. RAJARATNAM

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