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Fringe benefit tax on stock options
January, 21st 2008
One of the latest methods to compensate the employees is to issue to them shares in the employer company free of cost, or at concessional rates. Such schemes are popularly called Employees Stock Option Plans (ESOPs). There has been some debate as to whether the employees are required to pay tax on the benefit they derive when shares are allotted to them under Stock Option Plan. In case of Infosys, the Karnataka High Court has held that the benefit received under Stock Option Plans is not a taxable perquisite (see 159 Taxman 440). As reported in Business Standard (January 8, 2008), the Honble Supreme Court has affirmed the High Courts order.
 
But the government has introduced a new provision in the Income Tax Act whereunder effective from A/Y 2008-2009, the benefit to the employees under ESOP shall be liable to be taxed in the hands of the employer as fringe benefit tax (FBT).
 
In the above context, the CBDT vide Circular No. 9/2007 dated 20/12/2007 have clarified certain issues relating to FBT liability on foreign companies as under: A foreign company is liable to pay FBT on shares allotted to the employees of its Indian subsidiary. The aforesaid liability shall not be affected even in case of charge back of costs by the foreign holding company from the Indian subsidiary. In a case where the employee is posted outside India, it has been clarified that the Indian subsidiary would be liable to pay FBT in respect of the value of the shares allotted by the foreign holding company if the employee was based in India at any time during the period beginning with the grant of the option and ending with the date of vesting of such option (such period is referred to as grant period), irrespective of the place of location of the employee at the time of allotment of such shares. On the question about FBT in case the employee is based in India only for a part of the grant period, it has been clarified that a proportionate value of the fringe benefit will be liable to FBT. The proportionate amount shall be determined by applying to the value of the fringe benefit, the proportion which the length of the period of stay in India by the employee during the grant period bears to the length of the grant period. Similarly, clarifying the liability of FBT in respect of shares allotted to an employee who is deputed in India only in the year of allotment, the Board has clarified that a foreign company is liable to FBT in respect of shares allotted to its employee who is based in India. However, in such cases only a proportionate amount of the value of the fringe benefit will be liable to FBT. Where the benefit on account of shares allotted under ESOPs is taxed in the hands of the employees in different countries, would the employer still be liable to FBT?
 
Employer will be liable to FBT in India irrespective of whether employees have been charged to tax in different countries or not.
 
Any benefit liable to be taxed in the hands of the employer as FBT cannot be taxed in the hands of the employee as a perquisite.
 
The above clarification issued by CBDT not only determines the applicability of FBT but also the method of calculating the liability.

H P Aggarwal
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