practical tax & investment planning online
international tax expert / colunmist / author / speaker

Minus FBT Shock Pay Packets Rock!

Conveyance, Telephone, Entertainment & Medical Reimbursements Get Increasing Attention After FBT Abolition!

The notorious Fringe Benefit Tax (FBT) having been abolished with effect from 1st April, 2009, employers have started taking a fresh look at restructuring the pay packets of their employees to make them more tax friendly.

Conveyance, telephone, entertainment and medical reimbursements paid to employees, 20% value of which was treated as deemed fringe benefits, attracted an effective FBT liability of 6.798% in the hands of the employer. Thus, during the past four years of the FBT regime, several employers had taken a principled decision not to grant reimbursements to their employees on this account.

Medical & Telephone Reimbursements

Under Section 17(2) of the Income-tax Act, reimbursement of upto Rs.15,000 of medical expenses in a year, actually incurred by an employee on his medical treatment or the treatment of any member of his family, is treated as an exempt perk.

Under Rule 3 of the Income-tax Rules, any reimbursement granted by an employer to his employee for telephone expenses (including a mobile phone), actually incurred by an employee, is treated as an exempt perk. It is pertinent to note that there is no monetary ceiling prescribed in regard to this reimbursement.

Reimbursement of Conveyance & Entertainment

In its landmark decision in the case of ‘CIT v/s. Kiran Shelat’ (235 ITR 635) the Gujarat High Court has laid down that “reimbursement by an employer of actual expenditure incurred by an employee for purposes of traveling, conveyance or entertainment while discharging his official duties do not result in any profit or gain to the employee and the same cannot be treated as a salary or perquisite u/s. 15 or 17 of the Income-tax Act.

A similar view was also taken earlier by the Gujarat High Court in the case of ‘S. G. Pgnatale v/s. CIT’ (124 ITR 391) wherein it was held that although money goes into the pocket of an employee, but if it actually represents reimbursement of a necessary disbursement, the same would not amount to a taxable perquisite in his hands.

Reimbursements back in action!

In view of the above legislative provisions and the binding ratio of well settled judicial pronouncements coupled with the fact that FBT would no longer be attracted in the hands of the employer, reimbursements to employees for medical and telephone expenses even though incurred for personal purposes, and reimbursements for conveyance, traveling and entertainment for discharge of official duties are bound to receive increasing attention in the times ahead.

As regards medical reimbursement exempt within the prescribed limit of Rs.15,000 per annum, it needs to be also kept in mind that the benefit of the said exemption will be available only until 31st March, 2011, since the new Direct Tax Code has proposed not to continue the said exemption thereafter.

CBDT delays Perk Valuation Rules

Post FBT abolition the Central Board of Direct Taxes (CBDT) was expected to soon come out with the revised set of rules for valuation of perquisites. Nearly 45 days after the Union Budget, though the new draft of the Direct Tax Code proposed to be effective from 1st April, 2011 has been released, but the new perk valuation rules to take retrospective effect from 1st April, 2009 are still awaited. Infact, the delay by the CBDT is costing the revenue, because in absence of the same, employers have not been able to deduct any TDS as yet on taxable employee perks in the post FBT regime.

Leave a Reply

Powered by