Esops too are fringe benefits, to be taxed

Last updated: 13 March 2007

Companies may not be as generous with Esops since it would result in a rise in their tax expenses.

Employee stock option plans (Esops) will now be brought under the purview of the fringe benefit tax (FBT).

Thus, companies will now have to pay tax at full rate on the difference between the exercise value and the fair market value on the date of exercise of the Esops.

How the ‘fair market value’ is to be determined will be finalised shortly by the government. According to experts, in the case of a listed security the fair market value would be somewhere close to the current market value.

Earlier Esops were taxed in the hands of employees, if the employee was liable to pay capital gains tax at the time of the sale of the shares.

The latest move has raised concerns that companies may not be as generous with Esops because it would mean a rise in their tax expenses, at a time when wage costs are already high and increasing.

According to Vikas Vasal, director, KPMG, “Tax is not a deductible expenditure and the tax amount will be higher now.”

Adds Gautam Mehra, executive director, PricewaterhouseCoopers, “Most Esops, which were so far enjoying tax relief, would now come under the full purview of income tax.

That’s because Esops do not fall under the 20 per cent category for FBT. Thus, the employer will now have to pay fringe benefit tax on the benefit received by the Esop at the full tax rate 33.99 per cent.”

Vasal believes that the move could adversely affect Esops given to employees. Given the substantial increase in employee costs in India in the recent past, this will further strain the finances of companies, says Mehra.

The exercise value of the Esop is the price at which the options, granted to the employees, are converted into shares.

FBT, it may be recalled, was introduced a couple of years back. Companies are taxed on the perquisites that are provided to employees.

The expenditure on FBT is divided into three categories where 20 per cent, 50 per cent or 100 per cent of the value of the benefit is taken and the tax rate applied to this amount.

Experts believe Esops will fall in the 100 per cent category because this is perceived to be a full benefit to the employee and not a deemed benefit as in the case of transport expenses

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