INDIA - FBT is Ending, but it may be even worse for employees - 6 July 2009
FBT gone, but pay perquisite tax on ESOPs (see #4 below)
Published on Mon, Jul 06, 2009 at 19:48 , Updated at Mon, Jul 06, 2009 at 21:53
Source : Moneycontrol.com
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Budget
2009 has indeed been strange. It was widely expected that the first
budget in the new term of a resurgent UPA unhindered by coalition
forces would bring in big bang market friendly measures. There would be
major policy announcements on pressing issues such as disinvestment,
fuel policy, FDI, the worrying level of fiscal deficit etc. However,
none of this happened.
Acutally, the first impression that one
got, immediately after the budget speech was that it was rather a
non-event. However, the fine print contains a number of amendments to
the law that the budget speech chose not to mention. While a detailed
analysis follows, it must be said that a number of these changes are at
the micro level -- fine tuning and fixing loose ends rather than any
‘big picture’ measures.
Significantly, the Finance Minister in
his budget speech announced that a new Direct Tax Code will replace the
current Income Tax Act and the same is going to be introduced within 45
days. One can’t help but get the feeling that the tinkering exercise
that Budget 2009 eventually turned into is a precursor to the new Tax
Code. Watch this space for updates.
In the meanwhile, the following are the major highlights of Budget 2009
1. Income tax slabs increased marginally.
The
basic exemption limit has been increased by Rs. 10,000 for men and
ladies and by Rs. 15,000 for senior citizens. This would translate into
a tax benefit for Rs. 1,000 for non-senior citizens and Rs. 1,500 for
senior citizens respectively.
2. Surcharge on income tax abolished.
Simultaneously,
the 10% surcharge has been discontinued for all categories of taxpayers
except for corporates. Since for individuals, surcharge was only
applicable to income above Rs. 10 lakh, this move will essentially
benefit only the higher income group. In other words, the highest tax
rate has come down from 33.99% to 30.9%. The 3% education cess stays
put for all taxpayers.
Income Level Applicable for FY 08-09
Income Level
Applicable for
Proposed by
Difference
FY 08-09
Budget 2009
Rs. 10,00,001
Rs. 2,25,500
Rs. 2,04,000
Rs. 21,500
Rs. 15,00,000
Rs. 3,90,500
Rs. 3,54,000
Rs. 36,500
Rs. 18,00,000
Rs. 4,89,500
Rs. 4,44,000
Rs. 45,500
Rs. 20,00,000
Rs. 5,55,500
Rs. 5,04,000
Rs. 51,500
3. No surcharge or cess on TDS
Currently,
all income subject to TDS is subject to the levy of the 3% cess and if
such income is above Rs. 10 lakh, even surcharge is applicable. Now, in
all cases, surcharge will not be applicable for TDS. Moreover, the
education cess will only be applicable in the case of TDS deductible on
the income of NRIs, foreign companies and the salaried class.
4. Fringe Benefit Tax (FBT) no longer applicable
One
man’s meat is another man’s poison. Abolition of the much hated FBT is
good for employers but not so good for employees. The reason is that
all many of those items that were taxable as FBT will now be subjected
to perk tax in the hands of the employees. Admittedly, the FBT in most
cases was being transferred / borne by the employee – however, such FBT
was @6.8%. Now since items earlier under FBT will be added to the
employees income as a perquisite, the tax will be applicable at the
slab rates which in all cases are above 6.8%.
For example,
immediately after the budget speech, a section of the media had hailed
abolition of FBT as a beneficial amendment. Take Employee Stock Options
(ESOPs). While, ESOPs will no longer be subject to FBT, now they will
be subject to perquisite tax in the hands of the employees. The perk
tax will be the difference between the Fair Market Value (FMV) of the
shares on the date of exercise of the options less the exercise price.
The story does not end here. Upon sale, capital gains tax will also be
payable. Capital gains will be calculated on the difference between the
sale price of the shares as reduced by the aforementioned FMV.
5. Scope of gift tax extended.
Readers
may know that as per Sec. 56, any sum above Rs. 50,000 in the aggregate
received from non-relatives was taxable as income of the recipient.
Since these provisions were applicable to ‘a sum of money’, hitherto,
non-cash gifts used to escape this gift tax net. For example, one could
gift say shares to anybody else (not necessarily a relative) and yet
escape paying any tax on this transaction. Budget 2009 has effectively
plugged this loophole.
Now, the value of any non cash property such
as land or building or shares and securities, jewellery etc. gifted
without consideration will be subject to income tax in the hands of the
recipient.
For immovable property the stamp duty valuation
will be considered whereas for movable property, the fair market value
on the date of the gift will be considered for arriving at the
assessable value.
6. Scope of Sec. 80E deduction extended.
Section
80E provides for a deduction in respect of interest paid on loan taken
for higher education. Now additional fields of studies (including
vocational studies) pursued after passing the Senior Secondary
Examination or its equivalent from any school, board or university
recognised by the Central or State Government will also be covered.
7. Sec. 80DD limit enhanced
Section
80DD offers a deduction in respect of medical expenditure on a
handicapped dependant. The present limit for deduction is Rs.50,000 if
the dependant is suffering from normal disability and Rs.75,000 if the
dependant is suffering from severe disability.
The Budget
proposes to increase the limit for severe disability to Rs.1 lakh.
However, the limit for ordinary disability is proposed to be retained
at the existing level of Rs.50,000.
8. Additional incentive for quoting PAN for TDS
The
government finds that non-quoting of PANs by deductees is creating
problems in the processing of income tax returns as also for granting
credit for TDS. In order to strengthen the PAN mechanism, it is
proposed that any person whose receipts are subject to TDS i.e. the
deductee, shall have to mandatorily furnish his PAN to the deductor
failing which the deductor shall deduct tax at source at the rate
applicable or 20% whichever is higher.
This would also be applicable
for those who file forms 15G or 15H. Forms 15G and 15H are filed by
investors requesting the institution concerned not to deduct tax at
source. What this means is that if these forms are filed without
quoting PAN, TDS will be deducted and that too at the rate of at least
20%.
9. Tax benefits for New Pension System (NPS)
Investment
in NPS (now open to all citizens) attracts tax benefits under Sec.
80CCD. This deduction was hitherto available to “employees” only.
However, Budget 2009 has amended Sec. 80CCD so as to extend the tax
benefit thereunder also to “self-employed” individuals.
A
significant point of note here is that there is a limit of 10% of
salary on the amount of Sec. 80CCD deduction for employees. Since there
is no mention of any similar limit for non-employees, it may be
inferred that for this category the overall limit of Rs. 1 lakh will be
applicable.
10. Advance tax limit doubled
Advance
tax needs to be paid if the tax payable for any financial year is Rs.
5,000 or more. This limit is being doubled to Rs. 10,000
11. Wealth Tax threshold doubled
Currently wealth tax is charged @1% in the net wealth exceeds Rs. 15 lakh. This limit too is being doubled to Rs. 30 lakh.
The writer is Director, Wonderland Consultants, a tax and financial planning firm. He may be contacted at sandeep.shanbhag@gmail.com
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Update from Baker & McKenzie
Legal Alert
July 6, 2009
For More Information
Narendra Acharya, Chicago
narendra.acharya@bakernet.com
June Anne Burke, New York
june.anne.burke@bakernet.com
Edward Burmeister, San Francisco
edward.d.burmeister@bakernet.com
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valerie.h.diamond@bakernet.com
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david.w.ellis@bakernet.com
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barbara.klementz@bakernet.com
Bonnie Levitt, San Francisco
bonnie.levitt@bakernet.com
Brian Wydajewski, Chicago
brian.wydajewski@bakernet.com
India Budget Would Abolish Fringe Benefit Tax on Equity Awards
The
budget statement for India's April 1, 2009 through March 31, 2010 tax
year, issued July 6, 2009, proposes abolishing the fringe benefit tax
(FBT) on equity awards retroactive to April 1, 2009.
Instead,
employees would again be subject to income tax (as salary) on the value
of the benefits, which would be subject to employer withholding. The
taxable event would be the exercise of a stock option and (presumably)
the vesting of an RSU or purchase of shares under an ESPP.
Employees
would be subject to capital gains tax on any gain on shares after
exercise of the option, vesting of an RSU or purchase of shares in an
ESPP.
It is not yet clear as to whether employers may use a market price on a U.S. exchange to compute the value of the benefit (e.g.,
spread on the option) without further ado, or whether the more
cumbersome method of using a Merchant Bank as under the FBT regime will
be required.
Absent further changes, this income will not be subject to social insurance contributions. It is unclear at this time whether the previous tax-favored treatment under Indian Guidelines will again be made available.
The retroactive effect of this raises issues as to option exercises, RSU vests and ESPP purchases since April 1, 2009. We hope to see more guidance on this soon.
Although this has not yet passed Parliament and received assent from the President, it is expected to come into law as proposed.
Companies
who have passed through FBT to employees or shifted to cash awards will
need to reevaluate their grant practices in India. We will advise as developments occur.
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This budget has been passed, get ready to implement your withholding process in India.
Jamie,
Thanks for the update. I attended a session yesterday with Sean Trotman and Kate Forsyth of Deloitte. They provided the floowing overview of what we knew and didn;t know as of 8/10/2009.
1. Employees would be subject to Indian income tax on value of equity awards.
2. Mandatory employer withholding
3. Valuation methodology has yet to be determined
4. Transfer/Sale
5. No distinction between qualified/non-qualified plan status
6. Amendments retroactive to April 1, 2009. Potential refund of 2009 FBT paid.
I am sure that anyeone can contact them for more information.
Sean Trotman
Deloitte Tax LLP
(212) 436 2211
strotman@deloitte.com
Kate Forsyth
Deloitte Tax LLP
(213) 593 4279
kforsyth@deloitte.com
Aug 18 Update on INDIA
Legal Alert
August 18, 2009
For More Information
Narendra Acharya, Chicago
narendra.acharya@bakernet.com
June Anne Burke, New York
june.anne.burke@bakernet.com
Edward Burmeister, San Francisco
edward.d.burmeister@bakernet.com
Valerie Diamond, San Francisco
valerie.h.diamond@bakernet.com
David Ellis, Chicago
david.w.ellis@bakernet.com
Jennifer George, San Francisco
jennifer.b.george@bakernet.com
Jennifer Kirk, San Francisco
jennifer.f.kirk@bakernet.com
Barbara Klementz, San Francisco
barbara.klementz@bakernet.com
Bonnie Levitt, San Francisco
bonnie.levitt@bakernet.com
Brian Wydajewski, Chicago
brian.wydajewski@bakernet.com
Update on India's Taxation of Equity Awards
The
budget proposal to eliminate fringe benefit tax ("FBT") and replace it
with income tax on employees on exercise of options, purchase of shares
in an ESPP or vesting in an RSU, has now passed both houses of India's
Parliament. Although it is not technically a final law until the
President of India provides her assent, she is required by the Indian
Constitution to assent to a "money bill" such as this. Hence, it is now
clear that the law will come into effect in its present form.
This
means that options which were exercised, RSUs which vested and shares
purchased under an ESPP on or after April 1, 2009, will be taxed at the
employee's regular marginal rate (up to 30.9%) and will be subject to
employer withholding. Provident fund or other social insurance contributions should still not be due on equity award income.
The
retroactive income tax withholding obligation applies even as to former
employees (employees who exercised their options, vested in their RSUs
or purchased shares under an ESPP on or after April 1, 2009, and who
have left employment before or after the taxable event but before final
enactment of the budget).
We
are advised by our colleagues at Thakker & Thakker that the Indian
employer is required to collect this tax and, if it is not successful
in doing so, must nevertheless pay it over to the government on behalf
of current and former employees. For current employees, it will
normally be possible to collect the required amounts out of salary. Also,
if the company has previously transferred the FBT to the employees,
withheld FBT on equity awards taxed on or after April 1, 2009, but not
yet paid over the FBT to the Indian tax authorities, the company should
be able to use these funds for purposes of satisfying its income tax
withholding obligation. If the company has already paid
over FBT to the Indian tax authorities in its June 15 advance payment
of FBT, it would need to apply for a refund. However,
since it may take some time to obtain the refund, the company likely
will have to use other funds to satisfy its withholding obligation.
Any late payment of the withholding tax is subject to interest at a rate of 1% per month. It
is not yet clear if the tax authorities will assert interest from the
time of the taxing event (e.g., exercise of an option) or rather only
from the final enactment of the budget. Finally, there is
still some uncertainty regarding the method of valuing the shares for
income tax purposes (under the FBT regime, valuation by a Merchant Bank
was required). However, it appears that the Merchant Bank
requirement will be eliminated; therefore, until further guidance, it
should be acceptable to use the market price of the shares.
As
we noted in our prior alert and webinar, it is critical to put
appropriate processes in place in India for tax withholding and
reporting and to communicate relevant information to the Indian
workforce.
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