The Hindu Business Line : Can employers recover FBT paid on benefits other than ESOPs?

Chennai May 12 FBT saw a fresh twist a few days ago - that the employers can recover from their employees fringe benefit tax on ESOPs (employee stock options).

A few voices are quick to point out that the legislative approval for FBT recovery on ESOPs offers some scope for minimising the FBT burden on taxpayers, much to the chagrin of many in the IT (information technology) industry who wail over all their wasted tears, shed in the aftermath of the Budget 2007, protesting against the very idea of taxing stock options.

Meanwhile, niggling questions arise about the accounting and tax impact of FBT recovery, and about the legality of recovery with regard to tax paid on benefits other than ESOPs. "Employers (including firms) can take some clue from the amendments proposed by the Finance Minister, and broad-base the FBT recovery mode on all expenses liable for FBT by arrangement with the employees," says Mr V.K. Subramani, an Erode-based chartered accountant.

"FBT provisions contained in the Income Tax Act and the long list of clarifications in Circular No. 8/2005 dated August 29, 2005 do not bar recovery of FBT from the employees," he explains. The only difficulty for employers, however, can be the need to maintain employee-wise fringe benefit details.

Assuming that the employer is able to recover FBT from employees, the next question is whether the recovery would be chargeable to tax. The answer, as you would have expected, is in the affirmative. To ensure a tax-neutral situation, therefore, the employer may have to `gross up', points out Mr Subramani. "For example, if the fringe benefit value is Rs 1 lakh and the tax liability is Rs 33,900, the `grossed up' recovery from the employees must be Rs 51,280 (i.e. Rs 33,900 x 100 / 66.1)."

FBT recovery can be accounted for in the `paid' account, and "the resultant net balance could be transferred to profit and loss account." In the case of ESOPs, the amount of FBT recovered from the employees could be treated as issue price of shares, being a capital receipt, distinguishes Mr Subramani. In this case, the recovery will not be chargeable to tax.

"Employees can check if the `recovery' scenario is win-win, by comparing the pre- and post-FBT situation," he suggests. "Suppose perquisite value of motor car to the employee before introduction of FBT was Rs 26,400 per year (i.e. Rs 2,200 per month) and the tax thereon at 30.9 per cent was Rs 8,158. After the introduction of FBT, the same quantum of tax would fall on employer on the fringe benefit value of Rs 1.2 lakh."

Since depreciation on car, running and maintenance expenses, garage rent and so on are liable for inclusion for the purpose of fringe benefit valuation, employees may perhaps not mind the `recovery' if the fringe benefit value is below Rs 1.2 lakh, says Mr Subramani.

The question that remains is whether employees would be favourably disposed to any attempt by employers to recover FBT.