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Esops: FM likely to stick to Plan A and levy FBT
March, 19th 2007

The finance ministry may finally place the burden of employee stock option plans (Esops) on employers as part of the fringe benefit tax (FBT) package, instead of on employees as demanded by various industry bodies. A final decision will be taken in the amendments to the Finance Bill, to be tabled in Parliament after the recess.

The ministry feels that considering Esops a perquisite and taxing employees accordingly would be very difficult to achieve. The employers will have the option to pass the tax liability on to employees by charging it to their salaries.

Finance minister P Chidambaram introduced FBT on Esops as part of Budget 2007-08. Under the proposal, the difference in the market value of shares given under Esops on the date of exercising the option and the price that is paid for the shares would be treated as a capital gain. If the government considers the gain as a fringe benefit extended by companies to their employees, companies will pay 33.99% tax.

Tax experts, however, are of the view that Esops should not be considered a fringe benefit. Amitabh Singh, tax partner, Ernst & Young, said, Esops should be considered a perquisite and the employee should be taxed for it. It should be in proportion to his salary and the balance can be put under the capital gains tax.

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