Copyright 2010 Hewitt Associates LLC January 2010

Global Report



January 2010


India: Abolition of Fringe Benefit Tax and Introduction of Tax on Perquisites

The Indian government has released rules governing the taxation of fringe benefits, now payable by
the employee. Employers are required to determine the value of certain fringe benefits in order to
withhold the appropriate tax. This report summarizes the governments guidance on calculating the
value of fringe benefits. Employers may wish to review their compensation and benefits practices in
light of the elimination of the Fringe Benefit Tax (FBT) and the additional tax burden on employees.
On December 18, 2009, the Indian Central Board of Direct Taxes issued Income-tax (13
th
Amendment)
Rules, 2009 (Notification No. 94/2009), which provides specific guidance on the taxation of employee
perquisites. Earlier in the year, Finance Act 2009 had eliminated the Fringe Benefit Tax (FBT), which was a
tax paid by employers on many nonstatutory fringe benefits. The Finance Act 2009 replaced the FBT with a
tax on employees that is based upon the deemed value of certain perquisites provided by employers,
retroactive to April 1, 2009. The Act, however, only provided detailed guidance on the taxation of only
two perquisites:
Superannuation (SA) contributions exceeding INR 100,000 per employee per annum are a deemed
perquisite.
Employee Stock Options (ESOP) are taxable to the employee on the date the shares are acquired by the
employee. The tax is based upon the difference between the fair market value (FMV) of the shares on
the date of exercise less any amount paid by the employee for the shares. The employee also may be
subject to a capital gains tax at the time of sale based on the difference between the sale price and the
FMV on the date of exercise.
Notification No. 94/2009 provides details on the tax treatment of other employer-provided benefits.
Furthermore, it provides the formula for calculating the FMV of ESOPs.
Copyright 2010 Hewitt Associates LLC 2 January 2010
Valuation of Employee Perquisites
The value of the perquisite is added to an employees salary, and employers are required to withhold tax at
the applicable rate. For the purpose of determining the taxable value of these perquisites, the definition of
salary includes pay, allowances, bonuses, and commissions or any monetary amount by whatever name
from the employer. The definition excludes dearness allowances (unless they are included in the calculation
of superannuation or retirement benefits); employer contributions to a provident fund; tax-exempt
allowances and payments; lump-sum termination or retirement benefits; the value of perquisites; and other
expenditure; as per Section 17 of the Income Tax Act.
Residential Accommodations
The value of residential accommodations provided by the employer varies depending on whether the
accommodation is furnished, where it is located, and whether it is owned or leased by the employer.

Valuation of Employer-Provided Residential Accommodations
Accommodation Type

Perquisite Value
1

Employer-Owned Based on the population of the city in which it is located (from the 2001 census):
15% of salary in cities with a population exceeding 2.5 million;
10% of salary in cities with a population between 1 million and 2.5 million; and
7.5% of salary in other areas

Leased by Employer Actual rent paid or 15% of salary, whichever is less

1
Reduced by any rent paid by the employee



Furnishings are valued at 10% of their cost or the actual rental charges if from a third party.
The perquisite value for hotel accommodations provided to an employee (except where the accommodation
is for up to 15 days due to a workplace transfer) is calculated at 24% of salary or the actual charges paid to
the hotel, whichever is lower, less any amount paid by the employee.
Accommodations provided to employees working at remote locations or certain other locations (such as a
mining site or an oil exploration site) are not considered a taxable perquisite.
Motor Cars
The value of employer-provided perquisites related to motor cars depends on the type of vehicle, how it is
used, and who owns the vehicle.
Copyright 2010 Hewitt Associates LLC 3 January 2010
Valuation of Employer-Provided Motor Cars
Owner of the Vehicle

Use of Vehicle

Perquisite Value
1

Employer-Owned or
Rented
Exclusively for business purposes

Exclusively for private purposes




Mixed business-private use
None

Actual expenditure by employer,
including cost of driver plus 10% per
annum of the cost of the motor car
(towards wear and tear)

If employer pays maintenance costs:
INR 1,800 per month (INR 2,400 per
month if engine capacity exceeds 1.6
liters)
2

If employee pays maintenance costs:
INR 600 per month (INR 900 per
month if engine capacity exceeds 1.6
liters)
2


Employee-Owned Vehicle
(where maintenance is
paid by the employer)
Exclusively for business purposes

Mixed business-private use




Mixed business-private use of other
type of automotive conveyance
None

Actual expenditure by employer for
maintenance less INR 1,800 per month
(INR 2,400 per month if engine capacity
exceeds 1.6 liters)
2

Actual expenditure by employer for
maintenance less INR 900 per month

1
Reduced by any amount paid by the employee.
2
Plus an additional INR 900 per month if a driver is provided.




If an employer provides an employee with multiple motor cars that are not used exclusively for business
purposes, only one is valued as a perquisite for mixed business-private use. Any other motor car is valued
as a perquisite provided exclusively for private purposes.

If the motor car (or maintenance expenses) is provided for use wholly and exclusively in the performance of
official duties, the employer must maintain detailed records of the vehicles use and certify that the use is
wholly and exclusively for the performance of official duties.

Other Perquisites
The following benefits, whether provided to the employee or to any member of his or her household, are
considered taxable perquisites if not used wholly for business purposes. They are valued at the actual cost
of providing the benefit to the employee less any amount paid by the employee.
Copyright 2010 Hewitt Associates LLC 4 January 2010
Benefit Type

Perquisite Value
1

Interest-free or concessional loans Difference between the annual interest rate charged by the State Bank
of India on the previous January 1
st
less interest paid by employee on
the aggregate outstanding loan (for each loan as of the last day of each
month)

Loans provided for medical treatment of specified diseases not
exceeding INR 20,000 are not considered a taxable perquisite (the
maximum amount is reduced by any payment under a medical
insurance scheme)

Use of movable asset
(other than motor cars, laptops, and
computers)

10% per annum of the actual cost of the asset or actual rent paid by the
employer
Transfer of employer-owned asset Actual cost reduced for normal wear and tear at the rate of 10% per
annum (for each completed year of service during which the asset was
put to use by the employer)

Normal wear and tear is calculated by the reducing balance method at
the rate of 50% per annum for computers and electronic items and 20%
per annum for motor cars

Employer-paid vacation Actual expense or the cost of providing the vacation if the facility is
owned by the employer

Employer-paid food and non-alcoholic
beverages
Actual expense (not including food and beverage provided during
working hours or through nontransferable vouchers valued up to INR 50
per meal)

Gifts

Actual value of gifts exceeding INR 5,000 per year

Credit cards Membership and annual fees

Household staff
(such as a sweeper, a gardener, a
watchman, or a personal attendant)

Actual cost to the employer
Utilities such as gas, electricity and water

Actual cost to the employer (manufacturing cost if the facility is
employer-owned)

Free or concessional educational facility Actual expenses or the expenses in a similar nearby institution if the
facility is owned by the employer (excluding employer-owned
educational facilities provided to the employees children not exceeding
INR 1,000 per month per child)

Copyright 2010 Hewitt Associates LLC 5 January 2010
Benefit or amenity for transportation of
passengers or goods

Actual value of the benefit (excluding employees of airlines or railways)

Any other benefit, amenity, service, right,
or privilege provided by the employer
Actual value (excluding telephone or mobile phone expenses)

1
Reduced by any amount paid by the employee



Determination of Fair Market Value for ESOPs
The taxable value of shares and options is based on whether the share is listed on a stock exchange that is
recognized and registered under the Indian Securities Contract (Regulation) Act and listed in the
Government of Indias official gazette.

The FMV for shares listed on a recognized stock exchange is the average of the opening price and closing
price of the share on the exercise date. If there is no trading on the exercise date, the closing price of the
share on the closest preceding date is considered as the FMV. If the shares are listed on more than one
exchange, the exchange which has the highest volume of trade in the share is to be used.

For shares of companies not listed on a recognized stock exchange, the fair market value must be
determined by a merchant banker.

Employer Action
Employers need to take two immediate steps in light of the new regulations:
Because the law is retroactive to April 1, 2009, employers are required to withhold tax for the entire year
in the remaining three months until March 31, 2010.
Many multinational employers that provide ESOPs to employees in India will need to hire a merchant
banker for the purpose of determining the taxable value of shares. Some major global stock exchanges,
including the New York Stock Exchange (NYSE) and NASDAQ, are not recognized by the Indian
government.
Employers also should use this opportunity to review their long-term benefits strategy and consider several
uses of the tax savings gained by the elimination of the FBT such as:
Providing increased salary (or more benefits) to employees to compensate them for the additional
perquisite tax; and
Investing in the business and improving the companys financials in order to increase shareholder and
employee value.
Enhancing benefits programs can increase employee engagement and contribute to employee attraction
and retention, with resulting increases in productivity and profits. In particular, employers should review their
policies with respect to:
Superannuation;
Motor cars;
Copyright 2010 Hewitt Associates LLC 6 January 2010
Employee benefit insurance (health, life, and accident); and
Training and development.
In the long-term, the abolition of the FBT creates the need for providing employees with core and flexible
benefits.
Core benefits are benefits, both statutory and nonstatutory, that employers feel are necessary for all
employees.
Flexible benefits are those that employees select based upon their particular circumstances. Offering
employees a choice in benefits with the option of receiving cash in lieu of some benefits would be well
received by employees. It also would help the employer offer a better range of benefits at optimal cost.
Finally, employers should design marketing campaigns to take full advantage of the fact that expenditures
related to conference attendance and sales promotion and publicity are no longer subject to FBT.
Background on the FBT
The recent change in the taxation of employee benefits marks a reversal of policies implemented in 2005.
Effective April 1, 2005, many nonstatutory benefits in kind became subject to the FBT. The tax was levied
on the employer where employees or associates of employees received fringe benefits either from the
employer or from a third party.
The Income Tax Act, as amended, defined fringe benefits subject to the FBT as follows:
Any privilege, service, facility, or amenity directly or indirectly provided by an employer for current or
former employees by reason of employment;
Any direct or indirect reimbursement by an employer to an employee;
Any free or concessional ticket provided by an employer for private journeys of the employee and/or his or
her family members; and
Any employer contribution to a superannuation fund.
Benefits within these categories included items that were not considered employment benefits in other
countries, such as expenditures on conferences attended by employees or for sales promotion and
publicity. FBT-exempt benefits included expenses for food and beverages provided to employees, costs
incurred for fulfilling statutory obligations, and employee health and safety campaigns.
The FBT was levied at 30% (plus any applicable surcharge and education cess) on employers that offered
these benefits. For ESOPs, the value of the fringe benefit was the FMV of the ESOP on the date on which
the option vested less any amount paid by the employee. Benefits subject to FBT were tax free for
employees. The FBT was not deductible against corporate income tax. As a result, many employers
reduced or eliminated benefit programs to mitigate the additional tax burden. Some employers passed
along the tax impact whole or in part to employees.
The FBT was unpopular with employers because it created significant administrative and financial burden
and compelled them to rethink their compensation programs. Moreover, it created compliance challenges
for the government that were not offset by sufficient revenue generation.
* * * * *
Copyright 2010 Hewitt Associates LLC 7 January 2010
For more information, please contact AP Sugathan Nair (asnair@hewitt.com) or R. Arunachalam
(r.arunachalam@hewitt.com) in Hewitts Mumbai office (+91 22 4034-5000), or your local Hewitt consultant.
For more information on India, please refer to the Hewitt Country Profiles eGuide. You can learn more
about the Country Profiles eGuide here.