Impact of Fbt in India

Impact of FBT

Employees always keep an eye on the salary structure as most of the time any change in the tax laws impacts some part of the salary and thus salary restructuring is always likely. The Fringe Benefit Tax (FBT) has already resulted in such a situation.

Across the country, FBT has already made an impact on the salaried class in the benefits such as superannuation scheme, with companies deciding to shift from contributions to company superannuation funds in an employee’s overall compensation package.

The effect in most cases may be a withdrawal of some benefits, and a switch to a more transparent, all-cash compensation package. The effect could be a higher tax liability and in turn a lower take-home pay for employees.

Post-FBT, companies will pay an FBT at the rate of 30 per cent (plus surcharge and education cess) on an appropriately defined valuation, from 5 per cent to 100 per cent of the payout, on a range of expenses/payments/reimbursements (as shown in table 1 below).

This may force companies to change the salary structure. The paradox is that FBT was intended as a tax on employers, but it may be employees who will ultimately bear the burden.

The table below shows the FBT calculations for expenses paid by employer and expenses reimbursed to employee.

Table 1

Expenses paid by employer Total expenditure under the head Taxable amount Tax, surcharge and cess payable

Telephone/Mobile Y 0.20Y =(0.20Y) x 30% x 1.1x 1.02

Conveyance Y 0.20Y =(0.20Y) x 30% x 1.1x 1.02

Business promotion Y 0.20Y =(0.20Y) x 30% x 1.1x 1.02

Employees medical Y 0.20Y =(0.20Y) x 30% x 1.1x 1.02

Staff welfare Y 0.20Y =(0.20Y) x 30% x 1.1x 1.02

Tour & Traveling Y 0.20Y =(0.20Y) x 30% x 1.1x 1.02

Expenses reimbursed to employee Total expenditure under the head Taxable amount Tax, surcharge and cess payable

Conveyance reimbursement Y 0.20Y =(0.20Y) x 30% x 1.1x 1.02

Telephone/ Mobile reimbursement Y 0.20Y =(0.20Y) x 30% x 1.1x 1.02

Newspaper/ Books reimbursement Y 0.20Y =(0.20Y) x 30% x 1.1x 1.02

[Y is any amount of expenditure; taxable amount has been taken at a flat 20 per cent of Y]

Impact on the salary structure

Let’s now understand the impact of FBT on salary structure of employees and its tax implications. Earlier the salaries were staggered under various heads such as conveyance, transport, phone, medical, LTA, newspaper allowances, etc. Most of these heads were tax free.

Post-Budget 2005, a maximum of these heads have been merged with basic and HRA; with both basic and HRA being taxable, an increase in these two heads will actually increase the tax liability.

The table below shows the impact of FBT on the salary structure of an employee with an annual salary of Rs 5 lakh. His total tax liability increases from Rs 66,932.40 to Rs 83,456.40 a change of Rs 16,524.

Table 2

Total structure pre-FBT (Rs) Taxable pre-FBT (Rs) Total structure post-FBT (Rs) Taxable post-FBT (Rs)

Basic 240,000 240,000 276,000 276,000

HRA 120,000 120,000 138,000 138,000

Conveyance reimbursement 36,000 0 0 0

Transport allowance 9,600 0 9,600 0