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
Esops too are fringe benefits, to be taxed
Last updated: 13 March 2007
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Finance news reporter covering taxation, GST, income tax, business compliance, and economy updates. I simplify complex financial topics into easy-to-understand articles for professionals, taxpayers, and business owners on leading finance and tax platforms.
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