Latest tax bill clarifies liabilities for fringe benefits

By Sumes Dewan,KR Chawla & Co
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The Finance Bill 2008, contains proposals regarding the amendment of provisions in Chapter XII-H of the Income Tax Act 1961, related to the fringe benefit tax.

The proposed amendments are either a clarification or give relief to employers with respect to the fringe benefit tax liability. The key amendments are outlined below.

Electronic meal cards

Sumes Dewan,Partner,KR Chawla & Co
Sumes Dewan
Partner
KR Chawla & Co

The bill seeks to amend section 115WB(2)(B) to provide that expenditures or payment through an electronic meal card will not attract fringe benefit taxes if a number of conditions are met.

The meal card in question has to be non-transferable, prepaid, usable only at eating places or outlets and must satisfy certain conditions to be prescribed.

The revision will be enforced from 1 April 2009 and will, accordingly, apply to the assessment year 2009-10 and subsequent assessment years.

Crèche facilities, sponsorships of an employee sportsperson and organizing sports events for employeesare also exempted from fringe benefit tax.

The explanation to clause (E) of section 115WB(2) excludes certain expenses from employee welfare expenditure for the calculation of fringe benefit taxes.

Proposals have been made to enlarge the scope of the exclusion in this explanation.

One such proposal provides that the expenditures or payments to provide crèche facilities for the children of employees, the sponsorship of an athlete who is also an employee or the organization of sports events for employees, shall also not be considered as expenditure on employees’ welfare for the calculation of fringe benefit taxes.

These amendments will be in place from 1 April 2009 and will pertain to the assessment year 2009-10 and subsequent assessment years.

Guest house expenses

Clause (K) of section 115WB(2) states that expenditures on the running, repairs and maintenance of any accommodation in the form of a guest house, other than accommodation used for training purposes, shall be categorized as a fringe benefit.

This amendment will also take effect from 1 April 2009 and, in line with the exemptions on fringe benefits mentioned above, apply to the assessment year 2009-10 and assessment years in the future.

Stock options plans

There are also considerations when it comes to tax credits for the fringe benefit tax recovered by an employer from an employee with regards to employee stock option plans (ESOPs).
The insertion of a new section, 115WKB, clarifies some of the liabilities associated with stock option plans.

The new section maintains that where fringe benefit taxes (with respect to the allotment or transfer of specified security or sweat equity shares) have been paid by the employer and have been, subsequently, recovered from the employee, the recovery of the fringe benefit taxes shall qualify under tax paid by the employee in relation to the value of the fringe benefits provided to the employee by the employer.

According to Union Finance Minister P Chidambaram, an ESOP is classified as a fringe benefit.

When awarded, it should be taxed. Thus, employees hired and given an ESOP must pay a tax on it.

The deeming provision shall apply only to the extent to which the amount of recovery relates to the value of the fringe benefits provided to such employee.

It further seeks to provide that, notwithstanding anything contained in the act, in the above situation the employee shall not be entitled to any refund from this particular payment of tax.

Further restrictions

In addition, the employee will not be permitted to claim any credit of the tax payment against tax liability on other income or against any other tax liability.

This amendment would take effect from 1 April 2008 and would be valid for the assessment year 2008-09 and the following years.

Apart from “add back” of interest on the fringe benefit tax for the calculation of minimum alternate tax (MAT), there are no other proposals with regards to fringe benefits which would impose an additional tax liability on employers.

On the contrary, most of the proposed amendments related to fringe benefits grant some relief to the employers.

Sumes Dewan is a partner at KR Chawla & Co Advocates & Legal Consultants. The firm is headquartered in New Delhi and has offices in Chennai and Bangalore as well as a representative office in Singapore.

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