FBT abolished: Bad news for employees

CORPORATE India is a happy lot today. Their irritant for the last few years, the Fringe Benefit Tax (FBT) finally stands abolished. The tax, which added reams of paperwork to corporates but only Rs 10,000 crore or 3 per cent of total direct tax collections to the government's kitty has been repealed by Finance Minister Pranab Mukherjee, in today's budget presentation.

But that does not spell good news for employees.

FBT was introduced during the previous regime of the UPA government, with a view to ensure that all considerations paid by the employer to the employee fell under the purview of income tax. In a way, the tax rendered rightful, all types of payments made by employers to employees. Companies could pay perquisites to employees and pay FBT of around 6-10 per cent, which was recovered from the employees. Employees had little to complain about because the rate of FBT was far lower than the perquisite tax they would have to pay on these benefits (perquisites would be taxed at the regular tax rates; highest being 30 per cent).

Now, with the abolition of FBT, there are several questions about the real benefits. Tax expert Sandeep Shanbhag believes that employees were actually better off with FBT. In an online chat on moneycontrol post the budget, he pointed out, "Perk tax was what was applicable earlier before FBT came in the picture. All FBT items will be now added to the employee's income as perks and taxed at slab rates applicable."

When it comes to ESOPs, here is what Shanbhag says, "While, ESOPs will no longer be subject to FBT, now they will be subject to perquisite tax in the hands of the employees. The perk tax will be the difference between the Fair Market Value (FMV) of the shares on the date of exercise of the options less the exercise price. The story does not end here. Upon sale, capital gains tax will also be payable. Capital gains will be calculated on the difference between the sale price of the shares as reduced by the aforementioned FMV. "