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Tax Planning: Fringe benefit tax to hit employees with company cars

 

THE new perquisite rules have been notified and are applicable from April 1, 2009, for the current financial year. There is significant difference in respect of the taxability of the car benefit under the Fringe Benefit Tax (FBT) regime vis-à-vis the perquisite taxation.

FBT Regime

Under FBT, a fringe benefit was deemed to have been provided by the employer to its employees for the expenditure incurred and/or payment made for repair, running (including fuel), maintenance of the motor car and the depreciation thereon. Therefore, irrespective of whether the car was owned by the employer or by the employee, the expenditure incurred by the employer or the expense reimbursed to the employee was subject to FBT.


   Twenty per cent of such expense incurred/reimbursed was considered to be the fringe benefit, which was liable to tax at 30% plus surcharge and cess, as applicable. Hence, the effective tax on the expenditure incurred used to be 7% approximately of the expenditure incurred.

New Perk Rules

Under the new perquisite rules, a distinction is to be made between the car owned by the employer and the car owned by the employee, as the value of the tax perquisite in the two scenarios varies considerably. Even though there could be different permutation and combination, under which the car benefit could be provided by the employer to the employee, this article primarily focuses on two scenarios where the car is either owned by the employer or employee and the car expenses are met/reimbursed by the employer.

Car Provided By The Employer

Where the car is owned or hired by the employer and is used wholly and exclusively in the performance of official duties, no perquisite value is to be determined.
   If such a car is used exclusively for the private or personal purposes, the actual expenditure incurred by the employer as increased by the amount representing normal wear and tear, would be treated as perquisite value.
   In practice, generally, a car is provided for both official and personal use. In that case, the perquisite value is to be determined as Rs 1,800 per calendar month where the cubic capacity of the engine does not exceed 1.6 litre and Rs 2,400 where it exceeds 1.6 litre. In case a chauffeur is provided, Rs 900 is to be added to the aforesaid perquisite value.

Employee-Owned Cars

Where the employee owns the car but the actual repair, running and maintenance expenses are met or reimbursed by the employer and such car is used wholly and exclusively for official purposes, then there would be no perquisite value. However, where such a reimbursement is for both official and personal purposes, the perquisite value is to be determined as the actual amount of expenditure incurred by the employer less than Rs 1,800/Rs 2,400, depending on the cubic capacity and Rs 900 if a chauffeur is provided.

Employee-Owned Cars Lose Shine

Therefore, it is pertinent to note that while under FBT regime in both the scenarios, the tax impact was similar, however, the perquisite value and the corresponding tax could be significantly more in case the car is owned by the employee while expenses are met by the employer for use of car for both official and personal purpose. This is particularly an area of concern as in the instant case, the reimbursements have been made from April till date and would now need to be covered under the new perquisite rules and taxed accordingly. Thus, this tax needs to be withheld from January-March salary for the entire year.


   Further, cars provided by the employer to employee for both official and personal purposes do look more attractive now as part of overall compensation strategy.

 


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