Industry chamber FICCI has urged the Finance Ministry to amend the budget
proposal of imposing Fringe Benefit Tax (FBT) on employee stock options (ESOPs)
at the hands of the employer. Instead, ESOPs should be taxed only as perquisites
or capital gains at the employee level, for taxation to be just and
fair.
The difference between the `market price' (as defined by market
regulator SEBI) on the date of grant and the price at which the ESOPs are
granted to the employees should serve as the basis for computation of
FBT.
In cases where the Indian company does not issue its own shares nor
takes the ESOP cost in its books, the employee should continue paying the taxes
directly in the form of capital gains at the time of sale of the parent
company's shares in relation to all qualified plans, the chamber
suggested.
Nowhere in the world is ESOPs taxed as an employer's benefit
but is taxed as a capital gain or a perk at the employee level, the chamber
argued.
The Confederation of Indian Industry too has described levying of
FBT on ESOPs as a step to derail the momentum desired for ramping up employee
morale and commitment. In case it is not possible to scrap the proposal to levy
tax, the chamber suggested that the legislature should introduce the levy with
prospective effect on grants issued on or after April 1, 2007. As the levy of
FBT at the point of exercise will result in unenvisaged tax liability in the
hands of companies in respect of options, which have already been granted on or
before March 31, 2007, the business plans of companies will be substantially
vitiated due to the higher FBT incidence, argued the chamber.
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