Company carrots turn unprofitable
For many years, India’s emerging firms had to fight the larger companies to retain and attract talent. Then, tax-free ESOPs came as a mannah from heaven.
By Harsimran Singh, TNN |
For many years, India’s emerging firms had to fight the larger companies to retain and attract talent. Then, tax-free ESOPs came as a mannah from heaven. So, when finance minister P Chidambaram announced in his budget this year that ESOPs would attract fringe benefit tax (FBT), it was nothing short of a bolt from the blue.
Many grey areas still exist and small companies, be it foreign or Indian, are a worried lot. The finance ministry announced a 33.99% tax on ESOPs, which includes 30% tax plus 10% surcharge and 3% education cess. The value on which FBT will be levied is still not clear. Whether it will be levied on the fair market value on the day it is vested or the value on the day it is exercised, also remains unclear.
Smaller IT firms , which have not yet listed, were relying on ESOPs as a major means to attract and retain talent till last year. The FM’s new plan has put smaller companies in a bind. Says Sandeep Chaufla, director, BSR & Co, “If an employee exercises an option 4-5 years after the grant of ESOP, determining the exact value of the option on a date four years before, in case of a then-unlisted company, becomes difficult. It becomes virtually impossible to determine the book value on different dates for thousands of employees.”
There are several other counts on which FBT on ESOPs is hazy, according to small BPOs and IT firms. Though recovery of FBT on ESOPs from the employees have been made a legal right of the employer, whether the recovery will also be taxed is not clear.
In case it’s not deducted, it will amount to double taxation. The FM has also not made it clear whether ESOPs exercised by employees of an Indian company listed overseas and rendering services overseas will be liable for FBT. Besides, many small companies claim that it will be very expensive administratively to keep track of ESOPs exercised by employees. The task will become virtually impossible for larger companies, who have over 70,000 employees globally.
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There is also no clarity whether subsidiaries of MNCs, which are given stock options to distribute amongst employees and are not charged for them, will have to pay FBT. If yes, whether there will be a mechanism through which the taxman can determine how many ESOPs were exercised by employees since the books of MNCs overseas cannot be scrutinised. Because it amounts to zero expenditure for the subsidiary, the transaction will not show in its accounts. Says Subinder Khurana, president of MarketRX, a US-based pharma BPO, “It’s a retrograde step. The government has made ESOPs a liability. The picture is all the more unclear for US-based companies in India.”
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