Whether Transportation Facility To Employees Make One Liable Under FBT?

If the company is providing transportation facility to its employees for commuting from Home to office & back is it covered under FBT if it is then what is the percentage.Bhagya, Banglore

The answer to your question is given under Answer 104 of CBDT Circular No 8/2005 dated 29/8/2005 which is given as under

Whether expenditure incurred by the employer for the purposes of providing free or subsidized transport for journeys to employees from their residence to the place of work or such place of work to the place of residence would attract FBT ?

104. The free or subsidized transport provided to employees for journeys from their residence to the place of work or such place of work to the place of residence is in lieu of conveyance/transportation allowance, which is not liable to FBT. Accordingly, the expenditure incurred by the employer for the purposes of providing free or subsidized transport for journeys to employees from their residence to the place of work or such place of work to the place of residence will not be liable to FBT.

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Is FBT Payable On Sale of Car At Concessional Price By The Employer?

If employee purchases second hand car from his employer then it to be treat as perquisites and come under FBT and what rate tax or FBT employee or employer has to pay?Priti, Mumbai

The second hand car given to employee at concessional price, can be termed as perquisite u/s 17(2)(viii) of the I T Act taxable in employees hand. Therefore, it is outside the scope of Fringe Benefit Tax .The method of determination of value of the perquisite is given in section 17(2)(viii) itself in following words

The value of benefit to the employee arising from the transfer of any movable asset belonging to the employer directly or indirectly to the employee or any member of his household shall be determined to be the amount representing the actual cost of such asset to the employer as reduced by the cost of normal wear and tear calculated at the rate of 10% of such cost for each completed year during which such asset was put to use by the employer and as further reduced by the amount, if any, paid or recovered from the employee being the consideration for such transfer:

Provided that in the case of computers and electronic items, the normal wear and tear would be calculated at the rate of 50% and in the case of motor cars at the rate of 20% by the reducing balance method.

In plain words , the valuation will be done as under

Cost of the car xxxxxxxx

Less

i) 20% of the cost x nos of years xxxxxxxx

ii) Amount paid by employee xxxxxxxx

Perquisite Value xxxxxxxx

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Is A Contractor Filing Return Under 44AD Scheme Liable To FBT?

What is the liability of F.B.T in the case of contractor who is coming u/s 44AD.?
Vishal Jaiswal , Varanasi

FBT is a tax on the fringe benefits made available by the Employer to employee.Fringe Benefit Tax has no relationship with kind of income a person is earning. In fact , even if one does not earn income , one may be liable to FBT.Therefore , you should see whether the contractor is falling under one of the following kind of Employers who are only are liable to Fringe Benefit Tax

1. Company
2. Firm or AOP or Body Of Individuals
3. Trust
4. Local Authority
5. Artificial Juridical Authority

So , if the contractor is not falling any of the aforesaid categories of employer, FBT is not chargeable on him.

And then even if he falls under one of the aforesaid catagories, the contractor is liable for FBT only if it is spending on employee's fringe benefits as defined under section 115WB(1) & 115WB(2) of the I T Act.

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Is Free Lunch Coupons of Sodexho Taxable ?

Can you please provide the details of exemption limits on meals provided by employer as well as meal coupons issued by Sodexho. I am informed that there is a provision for getting exemption of Rs 2500 per month under this. Can you please explain with the relevant income tax rule under which this is allowed. P V Gopi Ramanan ,Hyderabad

You have not stated whether the employer is a company or a firm or Individual or HUF. From FY 2008-09 , the tax treatment of such facility enjoyed by employee depends on whether the Employer is chargeable to FBT or not. Therefore , answer is given for both types of employer separately

If Employer Within Ambit of FBT, Then..

The treatment of the facility of providing free meals or food is now under FBT regime and grouped together under "deemed fringe benefits" . Section 115WB(2)(B) from Asst Yr 2009-10 (FY 2008-09 ) is as under

(B) provision of hospitality of every kind by the employer to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade but does not include

(i) any expenditure on, or payment for, food or beverages provided by the employer to his employees in office or factory;

(ii) any expenditure on or payment through paid vouchers which are not transferable and usable only at eating joints or outlets;

(iii) any expenditure on or payment through non-transferable pre-paid electronic meal card usable only at eating joints or outlets and which fulfils such other conditions as may be prescribed;

Answer 52 of CBDT Circular 9/2005 is on the matter of provision of food and beverages and makes the position clear as far as FBt is concerned

At times, employees order for food and beverages in the office premises while working after office hours. The employer reimburses the cost of such food and beverages to the employee. Would such reimbursement be considered as ‘any expenditure on, or payment for food or beverages provided by the employer to his employees in office or factory as per the exceptions provided by section 115WB(2)(B)(i) so as to be excluded from ‘fringe benefits’? In other words, for the exclusion to operate is it necessary that the employer has to pay to the supplier directly and not reimburse the employee?

52. The provisions of sub-clause (i) of clause (B) of sub-section (2) of section 115WB of the Income-tax Act provide for exemption from FBT only in respect of expenditure incurred on food or beverages procured by the employer for providing to his employees in an office or factory. Therefore, if an employer reimburses to the employee expenditure on food or beverages consumed by the employee in the office, such reimbursement would not fall within the scope of sub-clause (i) of clause (B) of sub-section (2) of section 115WB of the Income-tax Act and will be liable to FBT.

Therefore, if your employer is under FBT , the meal during office hours or through meal coupons of Sodexo may not be liable to tax under FBT and since there is no I T Rule for valuation of such perquisite , it is also not taxable in employees hand.

If Employer Not Under FBT, Then?
As per newly inserted I T Rule under Rule 3 (7)(iii) , the perquisite of free meal provided by to an employee by an employer who is not under FBT regime is taxable perquisite

(iii) The value of free food and non alcoholic beverages provided by the employer, who is not liable to pay fringe benefit tax under Chapter XIIH of the Act, to an employee shall be the amount of expenditure incurred by such employer. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity:

Provided that nothing contained in this sub-rule shall apply to free food and non-alcoholic beverages provided by such employer during working hours at office or business premises or through paid vouchers which are not transferable and usable only at eating joints, to the extent the value thereof in either case does not exceed Rs. 50 per meal or to tea or snacks provided during working hours or to free food and non-alcoholic beverages during working hours provided in a remote area or an off-shore installation.

Even in this case , meals provided during working hours in office is not taxable and also meal coupons which not transferable , to the extent of Rs 50 per meal is not regarded as perquisite.

Summing Up

1. Meal provided during the working hours are neither taxable under Fringe Benefit Tax in employer's hand nor taxable as perquisite in employees hand.
2. Non transferable meal coupons or electronic meal coupons to be used as select joints provided by employer who are under FBT is not taxable under FBT . It is also not taxable in the hand of Employee as perquisite as there is no I T Rule for valuation of such expenditure on meal by an Employer following under FBT regime.
3. Meals provided by employer during working hours who are not under FBT regime, are not taxable as perquiste .
4. Meal coupuns given by employer who are not taxable under FBT to the extent of Rs 50 is also not taxable as perquiste.

Remember ,between Fy 2005-06 to FY 2007-08 , many perquiste which were brought within the ambit of FBT were not taxable in hand of employee in case those were provided by employer not falling within FBT provisions like individual proprietor or HUF doing business. The reason was absence of valuation rule in absence of which the charging section fails.

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Simplest Rate Chart For FBT!

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Rule For Valuation Of Specified Security For FBT Notified!

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CBDT has notified new rules for valuing the specified securities for the purpose of fringe benefit tax. The rule 40D given below is self explanatory

[TO BE PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY,

PART -II- Section 3- Sub-section (ii)]

GOVERNMENT OF INDIA

MINISTRY OF FINANCE

(Department Of Revenue)

(CENTRAL BOARD OF DIRECT TAXES)

Notification

New Delhi, the 18th January, 2008

INCOME-TAX

S.O. 113(E). – In exercise of the powers conferred by section 295 read with Explanation (i) to clause (ba) of sub-section (1) of section 115WC of the Income-tax Act, 1961 (43 of 1961), read with section 22 of the General Clauses Act, 1897 (10 of 1897), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-

1. (1) These rules may be called the Income-tax (Second Amendment) Rules, 2008.

(2) They shall come into force with effect from the 1st day of April, 2008.

2. In the Income-tax Rules, 1962, in Part VII C, -

(i) in rule 40C, in sub-rule (4), clause (f) shall be omitted; and

(ii) after rule 40C, the following rule shall be inserted, namely:-

“Valuation of specified security not being an equity share in the company.

40D. For the purposes of clause (ba) of sub-section (1) of section 115WC, the fair market value of any specified security, not being an equity share in a company, on the date on which the option vests with the employee, shall be such value as determined by a merchant banker on the specified date.

Explanation.- For the purposes of this rule, “merchant banker” and “specified date” shall have the meanings assigned to them in clause (b) and clause (e) respectively of sub-rule 4 of Rule 40C.”

[Notification No. 11/2008/F.No.142/25/2007-TPL]

SOBHAN KAR, Under Secretary.

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CBDT Issues Circular On FBT on ESOP With 25 FAQs .

The Central Board Of Direct Taxes has released a circular Circular No 9/2007 dated 20/9/2007 which contains 25 frequently asked questions on ESOP. The excerpt of the circular is given below for the benefit of readers

Frequently Asked Questions

A number of issues have been raised by trade and industry at different fora after the presentation of the Finance Bill, 2007, after its enactment and also after the notification of Rule 40C. The questions and answers in the following section seek to clarify these issues:

1. Whether a foreign company is liable to pay FBT on shares allotted or transferred to the employees of its Indian subsidiary?

Answer In terms of the provisions of Chapter XII-H of the Act, an employer, being a company, is liable to pay FBT in respect of the fringe benefits provided or deemed to have been provided by it to its employees, directly or indirectly, during the previous year. Since the shares are allotted or transferred to employees of the Indian subsidiary, by virtue of their employment with the subsidiary company, the liability to pay fringe benefit tax on such shares vests upon the Indian subsidiary and not on the foreign company.

2. Whether charge back of costs by the foreign company to the Indian subsidiary is relevant to determine the obligation of the Indian company to pay FBT?

Answer: As stated in answer No.1, the Indian subsidiary is liable to fringe benefit tax irrespective of whether or not there is a charge back of cost by the foreign holding company.

3. Will FBT apply in case of employees of the Indian subsidiary for shares awarded by the foreign holding company if the employees of the Indian subsidiary are allotted or transferred shares while outside India?

Answer: In the answer to Question No.20 of CBDT Circular No. 8/2005 dt.

29.8.2005, it has been clarified that an employer is liable to fringe benefit tax on the value of fringe benefits provided or deemed to have been provided to employees based in India. Therefore, an Indian subsidiary would be liable to pay FBT in respect of the value of the shares allotted or transferred by the foreign holding company if the employee was based in India at any time during the period beginning with the grant of the option and ending with the date of vesting of such option (hereafter such period is referred to as ‘grant period’), irrespective of the place of location of the employee at the time of allotment or transfer of such shares.

4. How will the value of fringe benefit be determined in case where the employee was based in India only for a part of the grant period?

Answer: In a case where the employee was based in India only for a part of grant period, a proportionate amount of the value of the fringe benefit will be liable to FBT. The proportionate amount shall be determined by applying to the value of the fringe benefit, the proportion which the length of the period of stay in India by the employee during the grant period bears to the length of the grant period.

(The value of fringe benefit means the fair market value of the specified security or sweat equity shares, on the date on which the option vests with the employee, as reduced by the amount actually paid by, or recovered from, the employee in respect of such shares.)

5. Whether a foreign company is liable to fringe benefit tax in respect of shares allotted or transferred to an employee who is deputed to work in India in the year of such allotment or transfer?

Answer: A foreign company is liable to FBT in respect of shares allotted or transferred to its employee who is based in India. However, in such cases only a proportionate amount of the value of the fringe benefit will be liable to FBT. The proportionate value shall be determined
by applying to the value of the fringe benefit, the proportion which the length of the period of stay in India by the employee during the grant period bears to the length of the grant period.

(The value of fringe benefit means the fair market value of the specified security or sweat equity shares, on the date on which the option vests with the employee, as reduced by the amount actually paid by, or recovered from, the employee in respect of such shares.)

6. What will be the cost of acquisition of shares, referred to in question nos 4 and 5, where only a proportionate value of fringe benefit has been subjected to FBT?

Answer:- In accordance with section 49 (2AB) of the Act, the cost of acquisition of such shares shall be the fair market value on the date on which the option vests with the employee. The calculation of fringe benefit for the purpose of determining FBT does not change this value. Hence, the subsequent calculation of reducing such fair market value by the amount actually paid by or recovered from the employee as well as the calculation of proportionate value in certain
cases, referred to in Question No.4 & 5 above, will not change the cost of acquisition.

7. Where the benefit on account of shares allotted or transferred under Employee Stock Option Plans (ESOPs) is taxed in the hands of the employees in different countries, would the employer still be liable to FBT? If yes, can the employer claim credit for payment of tax by the employee in other countries?

Answer: Employer will be liable to FBT in India irrespective of whether employees have been charged to tax in different countries or not. An employer cannot claim any credit in India against its FBT liability for taxes paid by employees in other countries.

8. Where FBT, on account of shares allotted or transferred under ESOPs, has been paid by the employer in respect of an employee based in India and subsequently recovered from him, can such employee claim credit in a foreign country for this FBT paid by the employer in India?

Answer: Ordinarily, the employee is liable to tax in respect of fringe benefits received by him from his employer. However, the taxation of fringe benefits in the hands of the employee raises several problems. Accordingly, it was decided to introduce FBT as a surrogate tax on employer in respect of the fringe benefits provided or deemed to have been provided by it to its employees during the previous year. This being so, in a case where FBT, on account of share allotted or transferred ESOPs, has been paid by the employer in respect of an employee based in India and subsequently recovered from him; the FBT is effectively paid by the employee in respect of fringe benefits enjoyed by him. Therefore, such employee can claim credit, in a foreign country, for the FBT, on account of shares allotted or transferred under ESOPs, paid by the employer in India.

9. Whether the benefits arising on account of shares allotted ortransferred under ESOPs can be taxed as a perquisite under section 17 of the Act instead of being taxed as fringe benefit under Chapter XII-H of the said Act, at the option of the employer?

Answer: Any fringe benefit liable to be taxed in the hands of the employer under Chapter XII-H of the Act cannot be taxed in the hands of the employee as a perquisite under section 17 of the said Act. Therefore, an employer does not have an option to tax the benefit arising on account of shares allotted or transferred under ESOPs as perquisite which otherwise is to be taxed as fringe benefit.

10. Whether there will be any FBT liability in a case where the FMV on the date of vesting is less than the price paid by the employee to the employer for allotment or transfer of shares?

Answer: No. FBT would not be payable in such cases.

11. What will be the valuation methodology for foreign companies if the shares are not listed in a recognized stock exchange in India but are listed on any globally recognised stock exchange?

Answer: If the shares are not listed in a recognized stock exchange in India,the shares will be treated as unlisted. Accordingly, such shares will have to be valued by category 1 Merchant Banker registered with Securities and Exchange Board of India. However, if the shares are listed in any globally recognised stock exchange, the merchant banker shall use the listed price as one of the basis for valuation and recommend the best value.

12. Whether an independent valuation carried by any foreign merchant banker/other experts as recognized for the purposes of valuation in the foreign country be treated as sufficient compliance for the purposes of valuation of fringe benefit arising on account of allotment or transfer of shares under ESOPs of an unlisted foreign company or is it mandatory that the merchant banker should be registered with the Securities and Exchange Board of India.

Answer: For the purposes of valuation of fringe benefit arising on account of allotment or transfer of shares under ESOPs of an unlisted foreign company, it is mandatory for the valuer to be a category I Merchant Banker registered with the Securities and Exchange Board of India.

13. When there exists different methods for valuing FMV for unlisted companies, which method should be used by the merchant bankers to determine the FMV?

Answer: The Merchant Banker should determine the FMV on the basis of alternative methods and recommend the most appropriate value.

14. What is the significance of specified date? Whether the valuation is to be made on a specified date or specified security or sweat equity share is to be valued as on the specified date?

Answer: The process of valuation may be carried out by the merchant banker at any time before or after the date of vesting of the option, but the specified security or the sweat equity share is required to be valued as on the specified date.

15. What is the FMV that a company should adopt if the shares have been valued by more than one merchant banker or by one merchant banker on more than one occasion?

Answer: The valuation which value the specified security or sweat equity share on the specified date, which is closest to the date of the vesting of the option, should be adopted, if the shares have been valued by more than one Merchant Banker or by one Merchant Banker on more than one occasion.

16. Whether the fringe benefit arising on account of shares allotted or transferred under an ESOP is allowed as deduction in calculating the taxable income of the employer company?

Answer: In case where the employer purchases the shares and then subsequently transfers such shares to its employees, the expenditure so incurred is allowable as deduction in computing the
taxable income of the employer company. However, if the shares are allotted to the employees from the share capital of the company, no deduction is allowable in computing the taxable
income of the company since no expenditure has been incurred by it.

17. Whether ESOPs issued to non-executive directors or non- employees liable to FBT?

Answer: Benefit arising out of ESOPs issued to non-employees will not be liable to FBT. However, in such cases, the taxability of such benefits in the hands of the non-employees will be determined in accordance with the existing law.

18. Which method, first-in-first-out (FIFO) or last-in-first-out (LIFO)shall be followed in case there are multiple date of vesting for different number of shares. For example if the dates of vesting are:

31 Mar 06 - 300 options - FMV Rs. 8 per share ( one share per option)

31 Mar 07 - 300 options - FMV Rs. 9 per share ( one share per option) and the employee is allotted 500 shares as on 30 September 2007, how will FBT be calculated?

Answer: In such cases, the First-in-First-Out (FIFO) method shall be followed. Hence, the FBT shall be calculated with respect to 300 shares at FMV of Rs 8 per share and 200 shares at FMV of Rs 9 per shares.

19. Whether it is binding upon the Assessing Officer to accept the valuation made by the merchant banker?

Answer: It is binding upon the Assessing Officer to accept the valuation made by the Merchant Banker unless the valuation by such banker is perverse.

20. How would the recovery of FBT be treated in the hands of the employer?

Answer: Since FBT is not an allowable deduction in computation of the income of the employer, any recovery of FBT will not be treated as income in his hands.

21. What should be the mechanism and timing of recovery of FBT?

Answer: The law does not provide for any specific mechanism or timing of recovery of FBT.

22. Is it lawful for the employer to recover FBT with respect to ESOPs granted prior to April 1, 2007?

Answer: It would be lawful for the employer to recover FBT with respect to ESOPs granted prior to April 1, 2007, but allotted or transferred to the employee after such date.

23. What will be the date of allotment of an Employee Stock Option?

Answer: The date of allotment of an Employee Stock Option shall be the date on which the underlying asset is allotted or transferred to the employee

24. Whether the FBT recovered from the employee would form the cost basis for employee for calculating Capital Gain on subsequent sale of shares?

Answer: No. The recovery of FBT from the employee by the employer will not change the cost of acquisition of the shares in the hand of the employee.

25. Will Rule 40C of Income-tax Rules, shall also apply in a case where shares are allotted or transferred to an employee under “Employee Stock Purchase Plan”, or “Employee Stock Option Scheme”, or “Employee Stock Ownership Plan”, or “Employee Stock Purchase Scheme”, or “Employee Stock Option Scheme” or “Employee Appreciation Rights or Plans”?

Answer: Rule 40C shall apply in all cases where specified security or sweat equity shares, being shares in a company, are allotted or transferred to an employee under any scheme or plan or otherwise.For the purpose of this circular an Employees’ Stock Option Plan shall include all such schemes or plans, etc. "

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Are 100 % Tax Exempt Companies Liable to Pay FBT?

We are having a Software Outsourcing IT enabled Company. This is approved by the Software Technical Park of India (STPI), Govt. of India and it is a STPI Unit. We are completely exempted from income tax since all our income is on foreign currency and no income in Indian currency as per rule.Now will you please let me know whether the Fringe Benefit Tax will apply to our Company since we are completely exempted from tax. P. Natarajan

In my opinion , fringe benefit tax provision is applicable on you .This is on account of section 115WA(2) of the I T Act which makes it clear that employers though not liable to pay any tax on his total income , are still liable to pay tax on the fringe benefits .The said section 115WA is given as under:

Charge of fringe benefit tax.

115WA. (1) In addition to the income-tax charged under this Act, there shall be charged for every assessment year commencing on or after the 1st day of April, 2006, additional income-tax (in this Act referred to as fringe benefit tax) in respect of the fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year at the rate of thirty per cent on the value of such fringe benefits.

(2) Notwithstanding that no income-tax is payable by an employer on his total income computed in accordance with the provisions of this Act, the tax on fringe benefits shall be payable by such employer.

Accordingly ,following employers may also have to pay tax on fringe benefits:

1. 100% EOU ,SEZ units, Units Claiming deduction under Chapter VI-A;
2. Loss making companies or firms despite having carried forward losses;
3. Employers whose total income is exempt u/s 10A or 10B;
4. Any other kind of employers who are defined u/s 115W of the I T Act whether or not earning profit.

However,trusts or any persons registered u/s 10(23C) or section 12AA and political parties registered under section 29A of the Representation of People Act are out of the purview of FBT.

To know more on this , you can read this .

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Is FBT Applicable on Charitable Trusts?

Whether FBT is applicable to Charitable Trusts? Kishan Lal Agarwal

Proviso to section 115W(a) of the I T Act inserted from Asst Yr 2006-07 specifically exempts funds ,trusts or institution eligible for exemption u/s 10(23C) or registered u/s 12AA of the I T Act . The proviso states

Provided that any person eligible for exemption under clause (23C) of section 10 or registered under section 12AA or a political party registered under section 29A of the Representation of the People Act, 1951 (43 of 1951) shall not be deemed to be an employer for the purposes of this Chapter;

Earlier ,CBDT vide circular no 8/ 2005 clarified under question number 4 as follows :

Whether FBT is leviable on a company (registered under section 25 of Companies Act) even if it is registered u/s 12AA or its income is exempt

u/s 10(23C)?

4. FBT is not payable by a trust, fund or institution if its income is exempt under section 10(23C) or it is registered under section 12AA of the Income-tax Act. Therefore, a company registered under section 25 of the Companies Act will also not be liable to FBT if its income is exempt under section 10(23C) or such company is registered under section 12AA of the Income-tax Act.

Therefore if the trust is not getting any kind of exemption u/s 20(23C) or 12AA , it shall be under FBT.

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Is Provision of Car & Driver Taxable in Hand of Employee?

I want to know that the following are taxable perks in the hand of employee
1. If car owned by the employee and driver salary & repair and maintenance expenses reimbursed by the company
2 If car provided by the company and driver salary & maintenance expense reimbursed to employee
baljinder_s@.............com

The reimbursement of salary to the driver provided to an employee is not taxable u/s 17(1) i.e as salary. Further , expense on provision of car along with driver to the employee is also out of definition of perquisites. Even rule 3(2) of the I T Rule is deleted now. These expenses are now covered under the newly inserted Chapter XII-H for Fringe Benefit Tax .These types of expense are covered under two broader terms Conveyance and "Repairs & Maintenance of motor cars" given under section 115WB(2)(F) and 115WB(2)(H) respectively. The two sections are given below:

(2) The fringe benefits shall be deemed to have been provided by the employer to his employees, if the employer has, in the course of his business or profession (including any activity whether or not such activity is carried on with the object of deriving income, profits or gains) incurred any expense on, or made any payment for, the following purposes, namely:

(F) conveyance ;

(H) repair, running (including fuel), maintenance of motor cars and the amount of depreciation thereon;

Therefore answer to your questions are
If car is owned by employee , reimbursement of driver salary will fall within the term Conveyance and running and maintenance expense under section 115WB(2)(H.

In case car is provided to employee , same treatment is given .The salary of driver is taxed u/s 115WB(2)(F) and other expense on car including Depreciation under section 115WB(2)(H) of the I T Act.

In nutshell, the employee is not taxed at all for these expense.

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Is FBT Payable For Medical Allowance Upto Rs 15,000?

Is FBT is applicable to employer on reimbursement of medical bills upto Rs.15000 to their employees?radhi68@.........com

Yes.
FAQ no 69 of CBDT's Circular 8 of 2005 clarified regarding the issue of taxing medical allowance under Fringe Benefit Tax as under:

Whether medical reimbursement up to Rs. 15,000 (exempt in the hands of the employees) and medical reimbursement over Rs. 15,000 (taxed as perquisite in the hands of the employee) is liable to FBT?

If any sum is paid by the employer for expenditure actually incurred by the employee for medical treatment in an unapproved hospital and it exceeds Rs. 15,000 during the year, such sum is salary as defined in clause (1) of section 17 of the Act and liable to income-tax in the hands of the employee. There is no change in this position. Since such sum is taxable in the hands of the employee, the same is not liable to FBT.

However, if any sum is paid by the employer for expenditure actually incurred by the employee for medical treatment in an unapproved hospital and it does not exceed Rs. 15,000 during the year, such sum does not fall within the meaning of salary as defined in clause (1) of section 17 and is not liable to income-tax in the hands of the employee. Since such sum is not taxable in the hands of the employee, the same is liable to FBT."

What is clarified gave another bout of confusion. As the things stand today,there are two scenarios

1. Mr X working in a company B gets treatment in govt. or I.T approved hospital for Rs 50,000.
2. Mr Y working in company B gets treatment in an non govt. or I T unapproved hospital spends Rs 50,000

In case of X, company B will have to pay the FBT on Rs 50,000 because the Rs 50,ooo is not taxable in hands of employee, whereas in case of employee Y, the company will pay FBT on Rs 15,000 only which is exempt from tax in the hands of employee. On rest Rs 35,000, the employee shall pay tax under I T Act.

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FBT Advance Payment on ESOP Extended to 15th September!

News You Can Use

Press Information Bureau published following Press Release by Finance Ministry

"The Central Board of Direct Taxes (CBDT) has decided that the first installment of Fringe Benefit Tax, which is payable by tomorrow in respect of transfer or allotment of specified security or sweat equity shares to its employees, may now be paid by 15th of September, 2007 (the date of second instalment).

CBDT is currently in the process of notifying the method for determination of the fair market value. In the meantime, the first instalment of advance tax in respect of fringe benefit tax falls due on 15th of June. In the absence of a method for determination of the fair market value, it will not be possible for an employer to determine the value of the first instalment of advance tax related to fringe benefit tax in respect of allotment or transfer of specified security or sweat equity shares to its employees.

By virtue of the provision of clause (d) of sub-section (1) section 115 WB, introduced by Finance Act, 2007, an employer is liable to pay Fringe Benefit Tax on any consideration for employment provided by way of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by such employer free of cost or at concessional rate to his employees. The value of the fringe benefit is determined as the fair market value of the specified security or sweat equity share on the date on which the option vests with the employee as reduced by the amount actually paid, by or recovered from the employee in respect of such security or shares. The fair market value for this purpose is to be determined in accordance with the method prescribed by the Board"

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Seven Steps To Understand ESOP and Its Taxation!

1.What is ESOP ?

ESOP is short form of Employees Stock Option Plan. Under this plan, companies provides employees a plan by which the employees get an option to acquire shares of their employer company over a period of time at a reduced price or nil price. Therefore ESOP is primarily a kind of incentive to hold the employees to the company's fold .Therefore, question of taxing this perquisite and capital gains at the time of sale of shares received by the employees arise.

2.What are the new taxation scheme of ESOP?
The new scheme of taxation of Employees Stock Option Plan initiated by Finance Bill passed on 11th May 2007 and effective from 1/4/2007 is as follows

1. No taxation of perquisite in hands of employees.
2. Employer to pay Fringe Benefit Tax at the time vesting of shares in Employees.
3. Employee to pay capital gains tax at the time of sale of shares received under ESOP.

3.Fringe Benefit Tax To Be Paid By Employer

Section 115WB1(d) has been inserted in the I T Act to bring ESOP under FBT . The said provision and explanation therein made it explicitly clear that ESOP is under FBT

any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees).

4. How the value for fringe benefit on ESOP computed?
Section 115WC(1)(ba) gives the method of valuation of ESOP for the purpose of imposing fringe benefit tax. The said provision under 115WC(1)(ba) is as under

the fair market value of the specified security or sweat equity shares referred to in clause (d) of sub-section (1) of section 115WB, on the date on which the option vests with the employee as reduced by the amount actually paid by, or recovered from, the employee in respect of such security or shares.

What the aforesaid provision states in simple terms is

1. Fair market value (FMV) of shares has to be taken for valuation purpose.
2. The valuation date for FMV is the date on which the shares are vested in employee.
3. The value of fringe benefit shall be FMV reduced by amount paid by employee.
4. The FBT will be charged @ 33.99%

5. How the Fair market value is determined?
As per explanation, Central Board of Direct Taxes will come out with method of Fair Market Valuation . CBDT has not come out yet.But one should expect that FMV shall be almost equal to average rate on either NSE or BSE on the date of valuation.

6.What is this vesting of shares?

Under ESOP , an employee is given an option of buying the share of companies at a reduced priced. The Option is a Right but no obligation. Therefore , date of vesting of shares means
the date when the company allots shares to employee.

7. What happens when employee sells the shares received under ESOP?

The gains shall arise on sale of those shares. The value of capital gains shall be computed by reducing the cost of acquiring such ESOP shares from the sale consideration. For determining the cost of acquisition section 49(2AB ) has been introduced from 1/4/2007 so as to provide that fair market value taken for computing the FBT by the employer shall be taken as COST of acquisition of shares. The exact wordings of