income tax
The fringe benefit tax (FBT) faced significant opposition from India Inc.; however, it offered advantages to employees by exempting them from taxes on many perquisites. The repeal of FBT has introduced uncertainty regarding the taxation of these perks. Fortunately, there have been minimal changes to the valuation rules compared to the pre-FBT era. This article will examine notable aspects of employee benefits and allowances under the current legal framework.
The taxable value for the provision of an automobile, including running, maintenance, and driver costs, remains nil if the car is utilized solely for official purposes. If the employer permits mixed usage, deemed values apply for personal use. Notably, these deemed values have increased by 50%. Given that previous values were established years ago, this adjustment is warranted due to rising fuel prices.
Despite the general increase in living costs, the exemption for transport allowance under Rule 2BB remains fixed at Rs 800 per month. This limit was previously adjusted by the Sixth Pay Commission (SPC) for government employees. A 50% increase in this allowance would also be justified, reflecting current economic conditions.
The education allowance for children remains a modest Rs 100 per month, contrasting with the SPC's entitlement of Rs 1,000 per month, plus an additional Rs 3,000 for hostel subsidies. Given the importance of education, increasing this limit would be advantageous.
Employers providing meals during working hours, a legal requirement for factory workers and common in other workplaces, face challenges as the limit for meal expenses has reverted to Rs 50 per meal, a figure set eight years ago. With food prices increasing, this amount is insufficient. A revised cap of Rs 100-125 per meal would be reasonable and manageable for government tax revenues.
Before FBT, employee share plans had specific guidelines that allowed for tax deferment until employees sold their shares. With the discontinuation of FBT, these share plans are now taxable at the time of exercise, without deferment. Employees could face tax liabilities regardless of their liquidity status at the time of exercise, compelling them to sell shares to cover their tax obligations. Unlisted company employees may confront additional difficulties as they cannot sell these shares and may need to exercise them prematurely.
The valuation methodology reintroduced under the new regulations is similar to that prescribed during the FBT era. It does not adequately address that many employee share plans do not constitute stock options and lack an 'exercise' event. Reviving the prior exemption for plans conforming to specific guidelines would be beneficial.
Other benefits, such as credit cards and club memberships, necessitate precise record-keeping by employers, potentially creating challenges for compliance after extended periods. Additionally, the government has yet to clarify the status of any FBT paid in advance. Companies should pursue refunds, as this tax is no longer collectible under current laws. However, clearer guidance on this matter would enhance compliance clarity.
In summary, while the updates to perquisite rules are a step in the right direction, addressing remaining ambiguities and considerations will be essential. The hope is that the government will expedite resolutions on these outstanding issues to enhance the clarity and effectiveness of employee benefit taxation in India.