FBT cutoff: Esops get April Fool's Day surprise

Last updated: 24 April 2007

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COMPANIES hoping to escape the fringe benefit tax (FBT) on employee stock option plans (Esop) by allotting shares to their employees ahead of the government notification are in for a rude shock. The tax will be applicable from April 1, 2007, and, therefore, companies that have allotted shares under the head to employees after March 31, 2007, will be liable to pay the tax.

However, if the allotment was carried out before April 1, the companies manage to escape the tax. A host of companies — including Bharti Airtel, Moser Baer, Ranbaxy Laboratories, IL&FS Investments and Astra Microwave Products — have allotted shares to employees against Esops after March 31. However, some companies have been smart and timed the allotment of shares well before April 1, 2007.

After the passage of Finance Bill, 2007, the provision with regard to levy of FBT on Esops will come into effect from April 1, 2007, an official said. Although the government will issue a circular to give the guidelines on valuations after that, the provision will come into effect from that date itself.

The government is likely to come out with a circular to give guidelines to field formations to levy FBT on Esops. The valuation norms in case of listed companies will be based on Sebi rules while in the case of unlisted companies, the Central Board of Direct Taxes may give a separate set of rules.

In a typical Esop, employees are first given the options that vest with the employee for a certain period. After the period is over, the employee can exercise the option and acquire shares against it. He/she can then sell or hold the shares. The employee, however, cannot sell or transfer the options during the vesting period.

Most companies allotted shares against the options given to their employees before March 31, 2007, to escape the FBT.

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