The Hindu Business Line : Needed, a new prescription

IN THE realm of perquisite taxation, reimbursement of medical expenses is one of the more sensitive issues. Over the years, several circulars have been issued on two types of payments — normal reimbursement on a yearly basis provided by the employer and reimbursement of extraordinary medical expenditure incurred in a recognised hospital for specific diseases.

Employees are now increasingly taking the insurance route, thanks to group medical insurance and various other schemes from private sector insurance companies. That, however, does not in any way dilute the role of an employer in providing reimbursement to employees. The fringe benefit tax (FBT) virtually hits all types of payments relating to employee welfare.

This has naturally led to resentment among employees. FAQ No. 69 of Circular No. 8/2005 addresses the issue of FBT on medical reimbursement.

FAQ No. 69

"Whether medical reimbursement up to Rs 15,000 (exempt in the hands of the employees) and medical reimbursement over Rs 15,000 (taxed as perquisite in the hands of the employee) are liable to FBT?

"Answer: At present, if any sum is paid by the employer for expenditure actually incurred by the employee for medical treatment in an unapproved hospital and it exceeds Rs 15,000 during the year, such sum is `salary' as defined in Clause (1) of Section 17 of the Income-Tax Act and liable to income-tax in the hands of the employee. There is no change in this position. Since such sum is taxable in the hands of the employee, the same is not liable to FBT.

"However, if any sum is paid by the employer for expenditure actually incurred by the employee for medical treatment in an unapproved hospital and it does not exceed Rs 15,000 during the year, such sum does not fall within the meaning of `salary' as defined in Clause (1) of Section 17 of the Income-Tax Act and not liable to income-tax in the hands of the employee. There is no change in this position. Since such sum is not taxable in the hands of the employee, the same is liable to FBT."

Basically the circular has gone on the premise that FBT is applicable if an employee is not exposed to perquisite taxation.

Hence, the conclusion that up to Rs 15,000 is exempt in the hands of the employee and, therefore, FBT will arise. On the excess portion, as the employee is liable to pay income-tax, FBT will not arise. While this may appear to be a via media solution and more a balancing act, it ignores some basic principles of taxation.

First, medical reimbursement is prima facie treated as perquisite taxable under Section 17(2) of the I-T Act. The monetary limits on reimbursement are governed by circulars through delegated legislation. These limits may change depending on the circumstances. Since, on the face of it, it is taxable in the hands of the employees, the question of applicability of FBT should not arise. The basic approach to FBT, as laid out in various background material on the subject, is that it seeks to capture tax in the hands of the employer wherever identification is difficult in the hands of the employee and wherever the employee is not liable to any income-tax.

In the case of medical reimbursement, employees are liable to pay income-tax as perquisite subject of course to monetary limits of exemption. Hence, the logic of categorising the levy, as up to and beyond Rs 15,000, is misplaced and flawed. On this score, the Circular requires reconsideration.

In a country where salaried employees lament the lack of any social security mechanism, medical reimbursement as a subject has to be viewed in a slightly different context. Issues of this nature have to be handled taking an overall perspective rather than trying to find out whether some element of medical reimbursement has escaped tax.

The fact is employees have to deal with post-retirement financial needs without any support from the exchequer. With interest rates falling, the effective rate of savings has also been eroded. The family concept is slowly giving way to individual and fragmented societies. FBT has captured this issue purely from a monetary rather than a social security perspective.

(The author is a Chennai-based chartered accountant.)

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