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CBDTs circular belies India Incs hopes
December, 25th 2007
Tax deduction of fringe benefits

The Finance Ministry has belied India Incs hopes of getting tax deduction on the value of fringe benefits provided on the shares directly or indirectly allotted to employees under the employee stock option plans (ESOPs).

Some relief however may be available in cases where the employer company purchases shares and then subsequently transfers them to its employees under ESOPs.

For shares allotted to the employees from the share capital of the company, the CBDTs latest explanatory circular on FBT on ESOPs has made it clear that no deduction would be allowable in computing the taxable income of the company as no expenditure has been incurred by it.

The Central Board of Direct Taxes (CBDT) circular however said that expenditure incurred by an employer in purchasing shares and then subsequently transferring such shares to its employees would be allowed as a deduction in computing the taxable income of the employer company.

Tax experts contend that this may only have little practical value due to company law issues. The Indian company law does not allow an Indian company to purchase its own shares for subsequent re-issuance. Therefore, there may be little practical value in the clarification that expenditure incurred for purchasing shares and then subsequently transferring such shares to its employees would be allowed as deduction, Mr Amitabh Singh, Tax Partner, Ernst & Young India, told Business Line.

He felt that the Tax Department could have allowed deduction in all situations by relying on the Institute of Chartered Accountants of Indias Guidance note on share based payments, which requires expensing of stock options.

The income-tax law allows employers to recover the FBT from employees. The latest circular has also made it clear that any recovery of FBT would not be treated as income in the hands of the employer as FBT is not an allowable deduction in computation of the income of the employer.

To fully understand the implications of the circular, one would need to delve into other laws also. Further the feasibility of claiming tax credit in a foreign country by an employee in respect of FBT paid in India does not seem to have been well thought through, Mr Aseem Chawla, Partner, Amarchand & Mangaldas said.

Meanwhile, for the purpose of valuation of fringe benefits arising on account of allotment or transfer of shares under ESOPs of an unlisted foreign company, the CBDT circular said that it is mandatory for the valuer to be category-I merchant banker registered with SEBI.

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