Employee Stock Ownership Plan, or ESOPs, are in focus following the Walmart-Flipkart deal. What does it mean for the taxman? And if, triggered by the mega e-commerce deal, ESOPs get back in fashion, to what extent is it a good news for talent in India? To find out the answers, Business Today spoke to Ajay Gandhi, partner, Gandhi & Gandhi, a leading chartered accounting firm headquartered in Hyderabad with taxation as one of the core areas of expertise.
"There are no tax implications at the time of grant of ESOPs. Only, on the exercise of options, tax is payable on the perquisite value of stock options. Taxable Perquisite value of ESOP is Fair market value of the shares as on the date of exercise less amount recovered from the employee for exercise of option i.e exercise price," Gandhi said. "On sale of stock, tax is payable on the capital gains. Capital Gain is computed by reducing from the sale price, the Fair Market Value as on exercise date," he further added.
Here is an example:
1. Stock Options granted in 2017. No incidence of tax.
2. Options exercised in 2018. Amount paid to acquire 500 shares on exercise of option: Rs 1000.
Fair market value of each share at the time of option exercise: Rs 10.
Total fair market value of 500 shares: Rs 5000.
Perquisite to be taxed as salary income in 2018 = Rs 5000 less Rs 1000 = Rs.4000
3. Sale of 500 shares at Rs 20000.
Capital Gains = Rs 20000 less Rs 5000 (fair value in 2018) = Rs 15000.
Capital gains will be charged to tax as long term or short term depending on period of holding.
To what extent ESOPs are a good deal for employees and what has been the Indian experience in this? "ESOPs is good news. It is an amazing way for start-ups to compensate talent and have the heart and soul of their employees into building up the business. Because ESOPs do not involve a cash outflow, they are a great way of attracting expensive talent without paying cash," Gandhi said.
He further added, "Well-designed ESOPs can be major attraction for expensive talent to opt for start-ups instead of large companies. Employees find it attractive because ESOPs can turn into gold. If the business succeeds and is acquired or goes public."
But then, in the Indian context, he said, "For most Indian start-ups, the chances of their acquisition or going public are remote and if they are not able to convince the employees otherwise, ESOPs are no better than the paper they are printed on."
Finally, how does this all look from a Flipkart employee's perspective? "Clearly the employees of Flipkart are certain to benefit hugely because of the stock options held by them. Contrary to what was earlier hinted at, most employees will not get to encash hundred percent of the options immediately, but over a period of time. Former employees, we understand, may be able to encash, at least a bulk of it, only when the company goes public," Gandhi said.