Taxpayers have a reason to rejoice. The government has taken the sting out of the fringe benefit tax (FBT) on employee stock option plan. The Central Board of Direct Taxes, which on Tuesday notified the valuation guidelines for ESOP, has left the determination of fair market value (FMV) for unlisted companies on merchant bankers.
No valuation methodologies have been prescribed. Hence, the onus will be on the merchant bankers to choose the most appropriate one and the tax authorities have not been given any leeway to question or reject any valuation report, said Ernst & Young partner Amitabh Singh.
For listed companies, the guidelines have been drawn from SEBI norms. For them, FMV would be average of the opening and closing price on the date of vesting of option. If the stock has not witnessed any trading that day, the closing price of the share on any date closest to the date of vesting of option will be FMV. In case, the company is not listed on the date of vesting of the option, FMV will be the value of share determined by a merchant banker and would be valid for 180 days.
The guidelines are simple and straightforward when it comes to listed securities, but ambiguous where it concerns unlisted companies. The reason is that no methodology has been prescribed that a merchant banker will have to adopt for valuation, said BMR & Co partner Mukesh Butani.
There is also a view that a window has been left open for discussion, since no methodology has been prescribed for valuation by merchant bankers.
In case of unlisted companies, the guidelines have only specified that valuation is to be done by a merchant banker on the specified date. In the absence of any specified method to be followed, it may lead to debate as to which method or a combination of methods is most suitable in a particular case or situation. As different valuation methods could give different results, this may lead to possible dispute on FMV valuation and the method itself, said KPMG executive director Vikas Vasal.
FBT at the rate of 30% would be levied on the difference between the price at which the employee gets the option and FMV. The date of vesting of Esop will be the point of valuation and its exercise date will be the point of taxability. Sources said the rule for unlisted companies may well apply in case of companies which are not listed on Indian stock exchanges. Though, the notification has not said this in explicit terms.
It appears from the notification that companies whose shares are not listed in any stock exchange in India will have to resort to a valuation by an Indian merchant banker even if their shares are listed in an overseas stock exchange and the opening and closing prices are available. The logic for not recognising overseas stock exchanges is not clear, Mr Singh said.
FMV will also be used for calculating the capital gains arising from the transfer of specified security or sweat equity shares. Taxpayers, who had exercised their option and later sold shares, becoming liable to pay capital gains, will now be able to do so. CBDT is likely to issue a clarification that they would not be liable to pay penal interest. In the absence of a clarification, taxpayers would have to pay penalty at 1% per month as CBDT had not extended the date for payment of tax, unlike for FBT.