This is going to hurt. And salaried employees across the country are going to be in a foul mood. Those favourite perquisites they have enjoyed all these years are now coming under the taxman's axe.
When finance minister Yashwant Sinha announced in his Budget speech in February that perks would be taxed on a "cost to company" basis, he had already made wage-earners anxious. Now the nitty-gritty of the new rules announced by the ministry on September 25 have made their worst fears come true. Tax burdens will rise substantially. Says chartered accountant Girish Ahuja: "Everyone will be hit hard and no one will get relief in the new rules. Everything will have to be paid for now."
Into the tax net comes interest-free or concessional loans that employees availed from their companies, free moveable assets provided like computers and mobile phones, even travel passes issued to railways and airline staff. Company-given accommodation has become more expensive for a majority of all salary earners, as have company cars and chauffeurs. Says a tax official: "Perks had become a means of diverting income to save tax. A large part of people's income now come in the form of perks." Says tax consultant and chartered accountant Naresh Vaid: "The new rules take away much more than what they give. There is hardly any increase in rates but by broadbasing the system, the government has brought a lot into the tax net."
Interest-free or concessional loans to employees for house, car and other purposes have been a big incentive in corporate India. These will now be taxed. The value of the 'benefit' from these loans will be determined in simple interest terms at 10 per cent for housing and conveyance loans and 13 per cent for other loans. This means if you have taken a housing loan from your employer at two per cent interest, you will now pay taxes on 10 per cent minus two per cent, that is eight per cent. Says Vaid: "This is a tough provision and may have a long-term impact. It will make concessional or interest-free loans from companies less attractive." However, loans for medical treatment of up to Rs 20,000 will be exempted from tax.
Earlier, the value of rent-free housing was calculated in terms of a percentage of the basic salary and the market rent. The provision of market rent has now been done away with and a flat rate of 10 per cent of the salary will be added to a person's income for tax purposes in towns with over-four-lakh populations. For smaller towns, it will be 7.5 per cent of the salary. Even subsidised accommodation will now be taxed. Though this will benefit a few high-level executives who are given houses in posh localities where market rents far exceed the specified proportion of salary, all others will suffer.
Similarly, the taxable value for company-provided cars and chauffeurs, where the vehicle is both for business and personal use, has been doubled. The value of the perk will now be Rs 1,200 per month for cars up to 1.6-litre capacity and Rs 1,600 per month for bigger vehicles. Another Rs 600 of value will be added to the employees' salary if the company also provides a chauffeur.
For staff in the railways, airlines and transport authorities, all free passes will now be taxed. Says Ahuja: "This is by far the harshest provision in the new rules and will have a major impact on people used to such facilities."
And those who proudly display the household gadgets and moveable assets provided to them by employers will now have to pay a price for all that show. All moveable assets will attract tax and 10 per cent of their actual value will be added to a person's income for taxation—reduced by any amount recovered from the employee in this regard. And, even worse, the new rules do not mention any provision for depreciation of such assets. So you might end up paying tax on 10 per cent of the original price of your four-year-old mobile phone, when its depreciated value is nearly zero!
And for all those looking forward to the festival season, and attractive gifts from their companies, the dampener is that those valued in excess of Rs 5,000 in a year will now be considered as income. And taxed.
The only concession: people who get children's education costs reimbursed from their companies will be free of tax up to Rs 1,000 per child. The earlier figure was Rs 100. But lest this tax waiver lead to a population explosion, the reimbursements will only be available for a maximum of two children.
The finance ministry seems to have pulled out all the plugs to widen the tax net and mop up more funds. It has stretched the taxman's long arm to plug loopholes and increase compliance. But the question now is when just a mere two per cent of over one billion Indians are paying these taxes, is it anything to boast about?