Stock options must be taxed at employee level

Last updated: 06 April 2007 Follow on Google News

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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