Share ESOP tale: Taxman to remind MNC staff

Mumbai: The Indian tax office will alert multinational corporations to forewarn employees about the pitfalls of not disclosing their stock options. I-T department has drawn up a list of 42 foreign companies whose arms and subsidiaries employ over 1.2 lakh employees, many of whom are covered under employee stock option (ESOP) or employee stock purchase plans (ESPP).

Tax officials, according to an internal presentation of the department, would contact the HR and payroll cells of these MNCs to inform them about the employees whose names have figured in the lists shared by other countries of Indian residents owning assets abroad. The tax office is inundated with such data from other jurisdictions having 'automatic exchange of information' pacts with India.

Non-disclosure of security holdings post exercise of ESOPs, probably often unwittingly, could attract stiff penalty under the Black Money law while using the proceeds later to buy offshore properties or other assets could further complicate matters for taxpayers if the newly acquired assets are not declared in the I-T returns (ITRs).

Since 2012, taxpayers have to disclose their foreign assets -such as offshore bank accounts, properties, beneficial ownerships and trusteeship of foreign trusts, and properties- under the FA schedule of the ITR forms.

The present move by the department is part of the drive to tax undeclared overseas assets, with the number of resident Indians having foreign assets having tripled to 1.9 lakh last in 2023-24 from 60,000 in 2020-21.

"There is a myth amongst salaried employees that since their TDS on salary is deducted at source, there is no further tax obligation on them to make any disclosure in respect of assets including foreign assets," said Siddharth Banwat, partner at the CA firm S Banwat & Associates LLP.

"In fact, there are many startup founders who had initially set up ventures in the US while they were abroad and later returned to India but continued to hold equity which is allotted while they were non-residents. Here, the vesting of shares (or the acquisition of full rights) happens as the startup progresses. In such cases, there are lapses in reporting foreign assets including social security accounts. These are genuine mistakes and steps taken by the tax department to create awareness are welcome," said Banwat.

The present move by the department is part of the drive to tax undeclared overseas assets, with the number of resident Indians having foreign assets having tripled to 1.9 lakh last in 2023-24 from 60,000 in 2020-21.

According to Harshal Bhuta of the CA firm P. R. Bhuta & Co, “It is not unusual to encounter instances of non-disclosure of foreign assets and/or income among certain classes of taxpayers, such as erstwhile NRIs, foreign expatriates working in India, and employees receiving foreign ESOPs, often due to a lack of awareness. However, taxpayers have the opportunity to rectify such omissions by filing a revised return for FY 2023-24 before 31st December 2024, allowing them to report their foreign assets and income.”

“If this opportunity is missed, residents may still benefit from the foreign asset non-disclosure penalty exemption having a threshold limit of Rs 20 lakhs, effective from October 1, 2024, for foreign assets other than immovable property. Additionally, based on Supreme Court rulings, one may also be able to claim this limit to be retrospective,” said Bhuta.

Some of the large international banks and technology biggies are part of the MNCs shortlisted by the department. The department may get in touch with a few large Indian software companies, probably to sensitise the employees --- many of whom could join MNCs later --- of the significance of FA declarations.

Practitioners say that there is a lack of awareness even for local asset disclosure. “In many cases (where no foreign assets are involved) individuals do not make appropriate asset and liability disclosure which they have to do when total annual income exceeds Rs 50 lakh,” said Banwat.