Fringe Benefit Tax
Rule 40 C of the Income Tax Rules relates to FRINGE BENEFIT TAX and Valuation of specified security or sweat equity share being a share in the company .
As per clause (f) of sub rule 4 of this rule,
(f) equity share shall have the meaning assigned to it in section 85 of the Companies Act, 1956 (1 of 1956).
Now this clause is omitted.
A new Rule , 40 D is now added which reads as,
“Valuation of specified security not being an equity share in the company.
40D . For the purposes of clause ( ba ) of sub-section (1) of section 115WC , the fair market value of any specified security, not being an equity share in a company, on the date on which the option vests with the employee, shall be such value as determined by a merchant banker on the specified date.
Explanation.- For the purposes of this rule, “merchant banker” and “specified date” shall have the meanings assigned to them in clause (b) and clause (e) respectively of sub-rule 4 of Rule 40C .”
But why these amendments?
The Finance Act, 2007 amended the provisions of the Income-tax Act to provide that employers will be liable to pay fringe benefit tax on the value of ESOPs granted to employees as and when the specified security or sweat equity share were allotted or transferred to the employees. The value of ESOPs for the purposes of levy of FBT shall be the fair market value of the specified security or sweat equity share on the date of vesting of the options as reduced by the amount actually paid, or recovered from, the employee.
Explanation ( i ) to clause ( ba ) of sub-section (1) of section 115WC of the Income-tax Act defines “fair market value” to mean the value determined in accordance with the method as may be prescribed by the Board. Earlier, Rule 40C was inserted in the Income-tax Rules which prescribed guidelines for valuation of specified security or sweat equity shares being an equity share in the company. The said rule 40C has been amended to omit the definition of “equity share” as the same was not necessary in view of the term having been used in the charging section of the Income-tax Act without a definition, thereby allowing it to take its natural meaning. Further, a new Rule 40D has been inserted in the Income-tax Rules for the purposes of valuation of specified security not being an equity share in the company.
The amended Rule 40C and the new Rule 40D will take effect from the 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-2009 and subsequent years.
This is the explanatory memo issued by the CBDT along with the notification amending the Rules.
It is a wonderful step by the Board to explain why a notification is issued and what it purports to serve.
A couple of years ago, when TIOL was invited to address the CBEC, a Member asked me, “Why don't you publish the explanatory memorandum for each notification so that the intent of legislation is available to posterity? ”. I told them that we would be too happy to publish that if the Board can make the purpose available to us. But many in the Board felt that making the intent clear to us would be too much and asked us to get from the informal source rather than the official one.
CBDT Notification No. 11/ 2008 Dated : January 18, 2008