Tax Update 07 July 2009
Fringe Benefits Tax goes – ESOPs to be taxed as perquisites
The Finance Bill, 2009 has proposed to do away with FBT and ESOPs would now be taxed as perquisites. We have, unfortunately, not reverted to the pre-FBT regime where if certain Central Government guidelines were followed, stock options were not taxed as perquisites.
Under the FBT regime, the burden of paying the tax rested on the employer. Now, it has shifted to the employee.
The relevant date would be the date of exercise of options by the employee and the tax will be levied on the difference between the Fair Market Value (FMV) of the shares as on that date and the exercise price actually paid by the employee. Thus, whereas in the case of FBT, the relevant date for computation of tax liability was the date of vesting, whereas now it would be the date of exercise of options.
The ESOPs are granted at an exercise price of Rs.20 per option. The FMV on the date of vesting is Rs. 150 while the FMV on the date of exercise is Rs.200.
FBT regime Now Taxable Value 150 – 20 = 130 200 – 20 = 180
These provisions will be effective from April 1, 2009 and any ESOP exercised on or after April 1, 2009 would be taxed as a perquisite.
Capital Gains Tax
Any subsequent gain on sale of shares would be taxed as capital gains. The cost of acquisition for computing capital gains would be the Fair Market Value on the date of exercise of options. In case of a listed company, longterm capital gains tax would be nil but the holding period would start from the date on which the employee becomes the registered owner of the shares.
Status Quo for employees
It would be relevant to note that prior to this, though the FBT was to be payable by the employer, the law allowed the company to recover it from the employee and as a trend, almost all companies had introduced / amended the relevant clauses in the ESOP agreements which provided for recovery of tax from the employee. It was considered quite logical to do so since the actual benefit was being accrued to the employee and not the employer. Hence, the proposed change in legislation does not really mean that the employees were not paying tax earlier but would need to do so now. It just means that the methodology of recovery of tax has changed and has been simplified compared to what it was during the FBT regime.+ Read more…