Wednesday, July 8, 2009

WHY REMOVAL OF FBT IS NOT A GOOD NEWS FOR AN EMPLOYEE

The Union Budget presented by Mr. Finance Minister has left many people disappointed especially those who were expecting some"big bang" reforms from this budget. The budget did not lay out any such plan. But, this budget is being hailed by corporates on one account atleast ie. the removal of FBT or Fringe Benefit Tax which was introduced by erstwhile Finance Minister Mr. P. Chidambaram. This was a tax which was to be paid on all the perks enjoyed by an employee like car, company provided accommodation, ESOPs , conveyance etc. These perks were always taxed at the hands of the employee, but, FBT had transferred the onus of paying these tax to the employer. The employer,however, was free to collect this tax from the employee. FBT also meant that the effective rate of taxation was only little over 6 % as against the rate of tax charged to an employee based on his tax slab.

FBT was opposed by the corporates tooth and nail and now they have finally managed to get this off their back. This now means that the tax on perks will once again be taxed in the hands of the employee. This will increase the tax burden on the employee since the personal incpme tax rates are much higher than the FBT rate and it can go up to 30% of the perk as against just over 6% on FBT.

So, while corporates do not have to pay this tax , the employee will have to pay through his nose for the same benefits.Also the anomaly of charging tax on ESOPS on vesting stage rather than the time of actual sale is still not done away with. Hence, one will have to continue to pay on notional gain in one's shares without really realising the gain. This is a big anomaly which remains to be cured.

All the talk on TV shows about FBT removal leaving more money in the hands of the employee is misfounded. This might actually reduce the net take home salary for few . Hence, the old adage that "devil lies in detail" has come true one more time.

No comments:

Post a Comment