Date:07/11/2009 URL: http://www.thehindubusinessline.com/2009/11/07/stories/2009110750240900.htm

Back Vacuum in FBT regime

S. Murlidharan

The Finance (No. 2) Act, 2009 has given the quietus to the rather short-lived Fringe Benefits Tax (FBT) regime that shifted the tax liability on a whole lot of benefits enjoyed by employees onto their employers in a bid to break the logjam of inability to make a proper apportionment of common benefits enjoyed by group of employees or enjoyed both by the employer and employee(s). With the result, for the ongoing financial year, there is a vacuum, with the CBDT not bestirrin g to fill the void left by withdrawal of FBT on employers.

CBDT inaction

The CBDT’s inaction puts both the employers and employees in a bind — employers have no means of deducting tax at source on fringe benefits hitherto taxed in the hands of employers and employees facing a grim prospect of their last few months’ salary being substantially eaten away by TDS on fringe benefits assuming the CBDT wakes up towards the fag end of the ongoing financial year.

And should this happen, the employers of course cannot be blamed for visiting the hapless employees with bunching effect. The employees’ plight would be specially exacerbated should the new rules prescribed heightened tax liability by placing higher values on benefits such as use of company’s car for both personal and business use.

The employers were called upon to pay FBT on 20 per cent of the telephone expenses on the rather reasonable presumption that 20 per cent of the calls made from office phones are personal in nature. But the income-tax rules that apply to employees whose employers are not required to pay FBT gives complete exemption to the value of free telephone calls made by employees from telephones whose bills are picked up by their employers.

Now, would it be right to assume that provision of telephone which has been thought of as enuring for employees’ benefit to some extent is no longer so? The short point is uncertainty is not conducive to proper tax administration and justice.

It is possible that some of the experts may turn around and say that after all there is no vacuum because already rules are in place for those employers who were not subject to FBT.

Burden shifts

In other words, on abolition of FBT in the hands of employers, the burden of tax automatically shifts to employees who would be governed by the rules of valuation that has been invoked in respect of employees whose employers were not covered by the FBT regime.

To wit, rule 3 (2) (A) says that the value of perquisite provided by way of use of motorcar to an employee by an employer, who is not liable to pay FBT under Chapter XII-H of the Act shall be Rs 1,200 per month if a small car is provided without the services of a driver (emphasis added by the author).

The words emphasised shows one thing clearly. Technically, the CBDT cannot take the stand that the existing rules are sufficient to take care of the so-called void left by the withdrawal of the FBT regime because the provisions enshrined in chapter XII-H would be non est for the assessment years beginning 2010-11.

Therefore, if the CBDT wants to extend this rule across the board to all the employers, it has to say so in so many words. The short point is passivity cannot give rise to the presumption that the existing rules meant for those employers who were not covered by the FBT regime would now extend to every employer uniformly across the board.

Prevailing uncertainty

The uncertainty obtaining at present with regard to tax on fringe benefits enjoyed by employees is likely to foster wholly unwarranted actions on the part of employers who genuinely believe that the existing rules impliedly apply to all employees across the board now.

This stand of theirs may invite resentment from employees who would be equally correct in believing that in fiscal matters there is no scope for inference. Equally plausible is a situation where an employee may not have sufficient salary towards the fag end of the financial year for the employer to be able to deduct the backlog of taxes on fringe benefits from.

It may perhaps be that the CBDT is looking to life beyond AY 2010-11 when the new Direct Taxes Code (DTC) is likely to hold sway. And the DTC proposes to do away with the distinction between cash and non-cash salary resulting in an employee being saddled with a tax liability on what his employer spends on him.

But however distasteful it might be, the CBDT has to swing into action and end the uncertainty even if the vacuum is going to impact the assessment of employees only for one year, i.e., AY 2010-11.

It is the responsibility of an employee to pay advance tax if the employer is remiss in deducting tax at source. In the prevailing uncertain atmosphere, even an otherwise perfectly law-abiding employee may be harassed for not paying advance tax instalments on fringe benefits on which tax has not been deducted either.

(The author is a Delhi-based chartered accountant.)