FinMin notifies guidelines for FBT on esops

Last updated: 23 October 2007

The Finance Ministry has notified the guidelines for FBT on ESOPs. For listed entities,the fair market value, or FMV will be determined on the date of vesting.

FMV will be the average of opening and closing quotes of the scrip. For unlisted companies, the FMV will be determined by a Merchant Banker, on the vesting date.

The FBT will be 30% of the difference between FMV and the price that employee pays. The tax liability will be calculated as on the vesting date.

18 out of 34 P-notes issuing entities have submitted letter of intent, or LOI, for FII status.

For listed companies the fair market value of the shares will be valued on the date of vesting. The fair market value will be the average of the opening and the selling price of the stock on the vesting date.

The Fringe Benefit Tax, or FBT, will be 30% of the difference between the fair market value and the price, which the employee pays for the shares.

For unlisted companies, the fair market value will be a value that is determined by a merchant banker. The FMV will be calculated as on the date of vesting of the shares with the employee. The Fringe Benefit Tax will then be calculated in the same way as that for listed entities.

Seven months after the Finance Minister said that ESOPs would be subject to fringe benefit tax, the rules have been notified and the tax in the case of listed ESOPs will be calculated on the fair market value.

The fair market value is the average of the opening and closing price of the stock on the vesting date. But the liability will arise on the date that the shares have been transferred.

If the shares were vested in March, but it was transferred to your demat account in April, then the fringe benefit tax will have to be paid. It will be deemed, to have been transferred to your account, from this year onwards.

In the case of unlisted securities, the fair market value will be calculated according to valuations certified by a merchant banker. The capital gains, if any, that arise out of sale of the ESOPs will be calculated on the selling price minus the valuation price.

The employer is entitled to recover the tax that it pays from the employee. But the tax that has been recovered from the employee cannot be added to the valuation price.

There are no concessions. It is a flat 30% tax and in case of listed companies, we spoke to tax experts and there seems to be no ambiguity. There is 30% tax, on the difference between the fair market value and the grand price that you pay. But the liability will be crystallized only on the date of exercise. This means calculating the FBT as on the date of vesting, but you if you choose not to exercise it later, then there is no liability and the company does not have to pay FBT.

FBT can be recovered from the employees. Most employers are going to recover it from the employees. Some sort of practical problems will be faced by unlisted companies.

It says that merchant bankers will determine the fair market value in the case of unlisted companies. How many Category one merchant bankers are going to review the fair market value every 180 days is a question mark.

The one gray area we have is if an overseas listed company were to issue shares to an Indian subsidiary, to employees working for Indian subsidiaries. For example- a Goggle listed in the US were to offer shares to its Indian employees, would that be covered under the ambit of FBT? It is not quite clear from this and can be interpreted both ways.

Category Income Tax Report

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FinMin notifies guidelines for FBT on esops

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