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The ESOP uncertainty

FBT on ESOPs may blunt this retention tool.

By Shalini S. Dagar        Print Edition: October 21, 2007

When finance minister P. Chidambaram announced that employee stock options (ESOPs) given by companies to their employees were to be brought under the fringe benefit tax (FBT), the move was stoutly opposed by India Inc. To no avail, though. The legislation was passed. “Ideally it is a tax that should have been collected from the employee and not from the employer,” says Vikas Vasal, partner, KPMG, pointing to the implementation hassles that such a levy engenders.

“The value of the fringe benefit will be determined in accordance with a prescribed method, on the date of exercise of the option,” Chidambaram said in his budget speech. Six months on, the Central Board of Direct Taxes is still grappling with guidelines to calculate fair market value for listed and unlisted companies. So much so that last fortnight, the date for payment of the advance tax was pushed to December 15. Usually the first filing date for advance tax is June 15.

In the interim, companies are uncertain about the provisions that need to be made for the FBT payments or its accounting treatment. The smaller companies have been particularly hit hard by this additional levy as Kiran Karnik, President, Nasscom, told BT (see Muddle in the Middle on page 136): “ESOPs was one of the strategies adopted by the smaller players to attract and retain talent. With the FBT it has become difficult to issue them.”

The problem is not restricted to fresh issues by companies. The uncertainty is also affecting vesting of options granted earlier. D. Kurane, HR Head at YES Bank, points out that at his bank the first vesting for ESOPs granted in 2004 is due this October. “We are awaiting clarifications regarding computation of FBT so that it can be suitably incorporated in the ESOP scheme.”

As most companies intend to recover FBT from their employees, they are in a quandary. “This is especially so in cases where employees are leaving and their full and final settlement has to be done,” says Amitabh Singh, partner, Ernst & Young. An added problem is with regard to the possible double taxation of globally mobile workforce that moves between India and other countries. Most countries levy the tax on ESOPs of the employees and not the employer as is the case with India. “There is no corresponding foreign tax credit relief possible in case of ESOPs,” says KPMG’s Vasal. This might well make coming to India unattractive for expatriates.

With the messy implementation of the FBT it is one more issue to fret over at a time when talent is scarce and growth is breathtaking.

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