NEW DELHI: Valuation guidelines for fringe benefit tax (FBT) on employee stock options (Esops) may be tweaked slightly. Companies listed on select international stock exchanges may get to follow the norm meant for listed companies in India as the government may include select overseas exchanges in the list of recognised bourses.
Several MNCs have issued stock options of the parent, listed on an overseas stock exchange, to employees of Indian subsidiaries. In fact, some Indian companies in the IT sector are also listed abroad. At present, these companies will have to follow the guidelines meant for unlisted companies, sources said.
Tax experts said the move would make it easier for foreign companies, as they will not have to get a valuation done for the overseas parent.
“The government should consider at least some select overseas stock exchanges for MNCs on par with recognised stock exchanges for valuation purposes,” Ernst & Young partner Amitabh Singh said.
According to BMR & Co partner Mukesh Butani, the guidelines had raised doubts if stock options given by foreign companies were covered under FBT, even though it was intended in the legislation. The move will clear the air, he said.
As per the Central Board of Direct Taxes (CBDT) norms notified on Tuesday, the fair market value (FMV) would be average of the opening and closing price on the date of vesting of option in the case of companies listed on recognised stock exchanges.
If a share is listed on one or more exchanges, the average of the opening or closing price of the share on the recognised stock exchange that records the highest volume of trading will be considered. If the stock has not witnessed any trading on that day, the closing price of the share on any date closest to the date of vesting of option will be the fair market value.
However, there is a contrary view. “Another way of looking at it is that since the stock exchange system prevailing in a foreign jurisdiction may or may not be reflective of the true value of the shares due to various reasons, it is best left to the valuers to consider all relevant aspects while arriving at the true FMV of shares for FBT purposes, one of them being the listed price of the shares,” PricewaterhouseCoopers executive director Rajiv Anand said.
Unlisted companies, on the other hand, have to get valuation done through a category I merchant banker. FBT is to be levied on the difference between the price at which the employee has got the option and the fair market value. The rate of FBT is 30%. Taxability will arise when the option is exercised by the employee, while the date on which the option vests with the employee will be the point of valuation. Since FMV is to be calculated on the date of vesting and tax paid at the time of exercise, valuation will have to based on past parameters.
“The provisions have retrospective operation, which means they apply to options that would have been vested many years ago. Listed companies that have a long history of stock options and a large employee coverage will be hard put to go back in time and cull out opening and closing prices for each vesting date.
Since the rules are specific, they do not allow tax authorities to be liberal in their enforcement even if they want to,” Mr Singh said.
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