India Tax: New circular addresses treatment of fringe benefit tax paid during the 2009-2010 tax year

The Finance Act 2009 ("2009 Act") abolished the Fringe Benefit Tax (FBT) which was previously payable on share-settled equity awards. In August 2009, Presidential assent was received for the 2009 Act, following approval by Parliament earlier that month, and the 2009 Act has been effective retroactively since April 1, 2009.

The Finance Act 2005 introduced Fringe Benefit Tax on the value of certain benefits provided or deemed to be provided by an employer to its employees. Fringe Benefit Tax regulations required employers providing fringe benefits, including share-settled equity awards, to estimate their annual Fringe Benefit Tax liability at the beginning of each fiscal year and submit quarterly deposit payments to satisfy the anticipated liability.

With respect to the 2009-2010 tax year (which began on April 1, 2009), the first deposit was to be submitted to the tax authorities on or before June 15 2009. As such, most Indian employers had deposited the first installment of their anticipated 2009-2010 Fringe Benefit Tax liability prior to the confirmed abolition of FBT in the 2009 Act (effective April 1, 2009), and employers and employees (where the employer's Fringe Benefit Tax liability was recovered from its employees) have been seeking clarification on how to obtain refunds for Fringe Benefit Tax submissions.


Refund of advance Fringe Benefit Tax (FBT) paid

On January 29, 2010, the Central Board of Direct Taxes (CBDT) issued Circular Number 2/2010, announcing that any payment of FBT by employers with respect to their anticipated 2009-2010 FBT liability will be treated as advance corporate income tax paid by the employer for the 2009-2010 tax year. Therefore, employers can apply any previously submitted Fringe Benefit Tax payments against the corporate income tax liability that would be due on taxable income earned by the company in the 2009-2010 tax year (which ends on March 31). Additionally, employers who claim a loss for 2009-2010, may seek a refund for previously paid Fringe Benefit Tax via their annual tax return.

With respect to equity awards, Fringe Benefit Tax regulations previously allowed employers to recover the Fringe Benefit Tax from employees (i.e. employers were allowed to push this cost down to employees). Of note, employers may now take advantage of the "advance tax" treatment discussed above regardless of whether Fringe Benefit Tax, which has been remitted to the Indian Government (as FBT was an employer tax liability), was recovered from the employee or not.

Though Indian legislation does not specifically address repayment of Fringe Benefit Tax liability recovered from employees, the employer may consider either refunding the amount or using the recovered Fringe Benefit Tax for the employer's future withholding tax liability after obtaining the employees' consent.


Action

- Employers should review their upcoming advance income tax liability, due on March 15, 2010, and adjust this payment downward to the extent of any Fringe Benefit Tax payment submitted since April 1, 2009.
- As per our January 2010 India Global Rewards Update, companies should confirm the employees from whom they have recovered Fringe Benefit Tax and determine to what extent these previously withheld amounts can be applied as a credit against income tax withholding on 2009-2010 income and whether withholding should be reduced on any remaining 2009-2010 payments to employees.