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13. DIWALI GIFT ,EMPLOYER ,EMPLOYEE AND TAX

Diwali is a festival of lights ,crackers and Gift.All of corporate and non corporate are have a culture of sending gifts to Customers ,business associates and employees. In Personal life also we all are sending/exchanging gifts to family and friends .In this post we will try to cover the tax issue involved in Gift.The view expressed here in for discussion and if some bodies has different views than me can express it in comment section.

First take FBT (FBT): Fringe Benefit Tax

FBT is a tax which is applicable on All type of persons except Individual assessee as per section 115W of the income tax act .So Company ,firm etc are mainly liable to pay FBT .FBT is payable at maximum margin rate of tax i.e presently 30% plus 10% surcharge and 3 education cess on valuation of defined expenses at prescribed rates .So full expenses is not liable for FBT in all cases and deemed FBT is defined for various type of expenses between 5 % to 100%.So if valuation of expenses under FBT is 100% then we have to pay 33.99 % effective tax .and where the expenses valuation is 50% the net tax effect on a expenses reduced to 17 % (effective rate ).There are many clauses/expenses under/on which FBT is applicable but we discuss here only relates to Festival expenses and Gifts.
 
Festival expenses:As per section 115WB(2)(L) expenses incurred at the time of festivals is liable to FBT and valuation under FBT is at the rate of 50% .Means if have incurred expense of 100 Rs on Diwali celebration amount liable for FBT will be 50 Rs and tax on 50 will be 33.99 % will be rs 17 so effective rate on total expense of 100 will be 17 %.As per clarification given wide circular 8/2005 it has been clarified that the Diwali expenses are liable to FBT However, expenditure on celebration of Independence Day and Republic Day will not be liable to FBT because they are not festivals as normally understood. (question number 95)

Gift:As per section 115WB(2)(O) expenses incurred for gift to employees or business associates is liable for FBT and valuation rate is same as the rate of Festival expenses i.e 50%.so effective rate for total expenses is 17 % as explained above. As per main clarification circular on FBT 8/2005 related to Gifts has been given in brief here under
 
Question no 97:Expenditure on gifts under trade schemes or for promotion of company 's products to distributors / retailers is liable to FBT.

Question no 98:A gift to customer fall under the category gift (O) and not sales promotion. (98.)

Question no 99. Expenditure incurred on gifts provided to employees, on the occasion of marriage, is liable to FBT.

Question no (100). Gift in kind is also liable to FBT and for this purpose the cost to the employer of such gifts will be taken for the purpose of valuation.
even after levy of FBT ,I don't think that there is a major impact on culture of sending /presenting gift to employees and customers but in light of above rules and taxes how we can minimize "our"tax liability.Our in the sense whether tax paid for employer or employee and net tax out go by both the parties.Here are different cases are given how we can minimize tax liability

Case 1: where employee income is less than tax exemption limit or taxable income is less than 300000: when we present a gift to employee whose income is less than taxable limit in that case we have to pay as usual effective FBT rate of 17 % so expense of 100000 means 17000 FBT though gift from employer is not taxable for employee as its liable For FBT.

but in for these type of employees we should give cash bonus instead of gift as cash bonus will be treated as under Salary expense and not liable for FBT and taxable in hands of employees and included in their salary income but as the salary of these type of employees is less the taxable limit or taxed at the rate of 10% so net tax outgo will be Nil or 10% as the case may be but it will be less than FBT effective rate of 17% means saving of 7 to 17 % .

Case -2 :where employee taxable salary income is more than 300000 or more than 500000: In these type of cases if we give gift to employee in that case FBT effective rate remain 17 % and if allow bonus to employee ,employee has to pay tax at the rate of 20% or 30 % as the case may be .so in this cases we should give Gifts to employees as Gifts are not taxable in the hands of the employee and we will save net tax out go upto 3 to 13 % as the case may be .
I here assume that tax saving of employee is as good as as direct tax saving by the firm/company as the employees will be more satisfied with more net salary after tax.

In both of above cases if business is run by individual in that case it is beneficial to give gifts as FBT is not applicable on individual Assesses.

By this tip I think some of reader might have some insight on FBT and gift and able to save some tax out go

Now as per Income tax:
As per income tax act those benefits which are liable for FBT will not be included in the income of the employee as perquisites hence Income tax is not applicable on Gift received from employer as it is covered under FBT so no Tax Liability for employees on gift received from the employers

Personal Gift:
After discussing corporate gifts now check tax provisions for personal gift .For Diwali Gifts there is no specific provisions under the Income tax act and it will be covered under normal rules of income tax act applicable on gifts.