Perquisites and lengthy valuation rules are bound to return, but meaningful changes in light of the current economic scenario are much desired. Tax benefits for employees have been in place for long, and abolition of FBT (fringe benefit tax) will shift the tax burden back to employees. Wisdom requires that to boost economic growth, a greater disposable income be left in the hands of the individuals. Their greater spending capacity would create more demand and would encourage economic growth.
There are some key perquisite items which require consideration:
• Employee stock options
Until fiscal 2000, clause (iiia) of section 17(2) of the Income-tax Act, 1961, treated the value of any specified security provided free of cost or at a concessional rate as a perquisite. The difference between fair market value (FMV) on the date of exercise and price paid by an employee was considered as taxable value. With effect from fiscal 2001, the clause mentioned above was deleted and a proviso added to clause (iii) of section 17(2) of the Act. As per the changes, specified securities allotted under the prescribed scheme were exempt from tax, till the introduction of FBT. Such schemes not only helped employers improve loyalty, commitment and retention level of their employees but also helped their profitability by making employees stakeholders.
The FBT regime again made the benefit taxable, possibly because long-term capital gains from listed shares were exempt under section 10(38) of the Act, leading to a situation where employees would not have paid tax at any stage. While introducing the valuation norms for FBT, it was assumed that normally share prices move northwards and therefore to grant relief, FMV on the date of vesting was considered for valuation of benefit. The assumption, however, proved wrong because of long vesting periods and the economic meltdown, as the prices of shares fell considerably and in certain cases FMV of shares on the date of exercise was low even to absorb the cost of FBT.
In the current situation, the exemption granted earlier to specified schemes should be restored, at least for employees of unlisted companies, since whenever employees realize capital gains, they will pay tax on real gain (on the difference in sale price over cost). If for some reason it is sought to be taxed, then for computing perquisite value, FMV should be considered lower of price on the date of vesting or date of exercise and the tax should be paid thereon at the time of sale of Esop (employee stock option plan) shares.
• Food coupons, meal cards
Under the Income-tax Rules, 1962, rule 3(7)(iii) provides for valuation of expense incurred on food and non-alcoholic beverages provided by an employer. The said rule is currently applicable only to employers on whom FBT is not applicable. If FBT is abolished, it should be made applicable to all. But this alone may not help, as the current prescribed monetary exemption limit of Rs50 per meal in the said rule is too low and may need to be increased at least up to Rs100. Further, it is applicable only in the case of in-house canteen or for paid meal coupons and should also be extended to qualified electronic meal cards falling under rule 40E.
Further, there is a controversy that electronic meal cards may be fully taxable as perquisites. The reason is that this benefit is covered under the definition of perquisite under clause (vi) of section 17(2) of the Act and since no specific rule deals with its exemption/taxability, it may get covered under clause (ix) of rule 3(7). So, by providing that spending of Rs100 per day through qualified electronic meal cards covered under rule 40E is exempt, the controversy can also be put to rest. Provision of meals to employees is an important productivity tool. It is evident that the satisfaction level of employees is greater when they have a system of the employer having a provision for meals and therefore this benefit should be extended to all and may not be taxed as perquisite to a reasonable limit.
• Use of car by employee
Rule 3(2)(a) introduced with effect from 1 April 2008, currently applies only in cases of employees whose employers are not covered by FBT and may be made applicable to all. However, the difference in valuation norms in cases where the car is owned by the employer, and where it is owned by the employee does not appear to be logical. Perquisite value for partial use of a car owned by the employer is deemed at a fixed rate, while if it is owned by the employee, the employee is required to maintain exact details, which is quite onerous. A deemed value in such cases should be fixed and care should be taken that it should be low, as the employee does not even get the benefit of depreciation.
Although the government is encouraging better education facilities, it could supplement its efforts by allowing employers to meet all expenses (without any limit) of education of employees’ children even where the education facility is not owned and maintained by the employer. Education should not be taxed but supported.
Kanchun Kaushal is associate director and Amit Gupta is senior manager PricewaterhouseCoopers. Respond to this column at email@example.com