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Companies will have to bear FBT liability on ESOPs: FM
March, 05th 2007

The fringe benefit tax (FBT) on employee stock options (ESOPs) proposed in the Union Budget will be payable by the company and will also apply to the ESOPs not cashed, finance minister P Chidambaram said.

What has been stated (in the Budget) is that ESOP is a fringe benefit and it will be taxed. The rules have not been worked out and the method of calculation has not been prescribed.

It is only a policy announcement, the minister pointed out. Asked whether the company or the employee would be required to pay FBT on ESOPs, he said, It is a fringe benefit and obviously it will be on the company. Would it apply to ESOPs given before the Budget and not encashed, Chidambaram was asked. Of course, it will.

The gain is taxed only when the ESOP is exercised. When the ESOP is not exercised, there is no gain at all, he said in an exclusive interview here. A combative finance minister strongly defended his Budget and shrugged off criticism, notably by the corporate sector, saying that it was all on expected lines. I dont think one should get too despondent about criticism or get too flattered by praise. One should take both in stride.

In a dig at the corporate sector, Chidambaram said, the corporate sector gets an unduly large share of coverage in the visual media and the print media. The physically challenged who have been promised a hundred thousand jobs do not get access to media, he argued.

Meanwhile, in a veiled warning to cement manufacturers who have raised the prices after the Budget, Mr Chidambaram cautioned against their acting as a cartel. The Budget had reduced the excise duty on cement by Rs 50 from Rs 400 per tonne on the commodity sold at Rs 190 per bag while raising it by Rs 200 per tonne on higher retail price.

However, the manufacturers raised the price next day. Answering questions about the hike in cement prices a day after the Budget despite his plea to hold the price line, Chidambaram said, I hope they are not acting as a cartel. But if they are, it will be a very unfortunate situation. I am still hopeful that they will moderate the prices.

About the hike in car prices which the manufacturers had attributed to the 1% increase in education cess, the minister said the 1% cess cannot result in increase in the prices by Rs 10,000 or Rs 8,000. It is not 1% on the taxable income but 1% on the tax. It actually works out to 0.03%.

Mr Chidambaram expects interest rates to moderate once the current inflation level declines and made it clear today that the government was ready to take further fiscal, monetary and supply side steps to curb inflation.

Interest rate is a function of the monetary policy adopted by RBI. When there is tightening of the monetary policy interest rates will also go up, he said. In the last one year, the Cash Reserve Ratio (CRR) and Repo rate have been revised four times in order to tighten the monetary policy, Chidambaram said.

Once inflation moderates and RBI adopts a more accommodative policy, the interest rates will also decline. Interest rate is directly linked to inflation. Asked if inflation was a matter of concern, he said It is. If inflation is a matter of concern, high interest rates is also a matter of concern. If inflation moderates, high interest rates will also moderate. he added.

Asked what steps were being taken to carry out an assault on the price situation, the minister said the government has taken a number of steps on fiscal, monetary and supply side to manage it. We will always be ready to take further fiscal, monetary and supply side steps as and when they become necessary.

When suggested that the finance minister has to bear the brunt of attack politically and otherwise when prices rise, Chidambaram said prices are declining and some more prices will decline once the supply-side management is done.

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