Latest Expert Exchange Queries

GST Demo Service software link: https://ims.go2customer.com
Username: demouser Password: demopass
Get your inventory and invoicing software GST Ready from Binarysoft info@binarysoft.com
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing | GST - Goods and Services Tax
 
 
 
 
Popular Search: VAT RATES :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: TDS :: ARTICLES ON INPUT TAX CREDIT IN VAT :: due date for vat payment :: empanelment :: VAT Audit :: ACCOUNTING STANDARDS :: form 3cd :: Central Excise rule to resale the machines to a new company :: TAX RATES - GOODS TAXABLE @ 4% :: articles on VAT and GST in India :: list of goods taxed at 4% :: ACCOUNTING STANDARD :: cpt
 
 
« News Headlines »
 A tax saver scheme with higher returns
 GST registration mandatory for TDS entities
 Govt rules out extension for filing GSTR-3B returns after December
 Tax department’s e-filing portal out of action for 2 hours
 Use ITR-2 to show salary and capital gains income
  TDS Applicability On Government Contracts Under Gst (Under Section 51 Of The Cgst Act, 2017)
  How to file ITR for FY 2016-17 and all the links you need
 All about E-way Bill under GST
 Good and simple tax: on the GST regime
 Seeks to extend the time limit for filing of GSTR-1, GSTR-2 and GSTR-3
 Good news, find Tax Return Preparers soon at a place near you; 5 things to know

FBT on Esops is devoid of logic
March, 14th 2007

The Budgets proposal to tax employee stock options (ESOPs) as a fringe benefit is wholly unreasonable.

To begin with, ESOPs are not fringe benefits. They are part of compensation, bereft of any confusion regarding which individuals they benefit. Fringe benefits benefit employees as a group. At best, ESOPs can be taxed as a perquisite in the hands of the employees.

Ironically, an amendment proposed in the finance bill does away with the earlier provision that specifically disqualified ESOPs to be counted as a perquisite. The logical corollary should be to recognise ESOPs as perks and to tax them as such.

First, some clarity on how ESOPs work. A company allocates to an employee the right to buy, at a specified future date, a designated number of company shares at a designated price, called the exercise price. Till that future date arrives, these ESOPs vest with the employee, who cannot sell or mortgage them. When the ESOPs mature, the company issues to the employee the number of shares agreed upon.

Till now, ESOPs suffered taxation when the employee booked short-term capital gains, not waiting for a year after he gets hold of the shares to sell them off - after one whole year, the gains are classified as long-term capital gains and exempted from taxation when sold on the stock market, paying securities transactions tax.

Let us see what is the actual cost borne by the company in issuing ESOPs and converting them into shares at the time of maturity. An option to buy a share at a future date at a price determined now comes at a price, called the option premium. The formula to arrive at this option price is complex enough to have fetched two of its three principal architects a Nobel prize in economics (Myron Scholes and Robert Merton in 1997 - Fischer Black missed out because he died in 1995).

It takes into account the price of the underlying stock, volatility, the strike price and the rate of interest. The lower the strike price, as compared to the underlying stock price, the higher would be the price of the option. In the case of an ESOP, the employee does not pay any option premium (except, of course, in the form of blood, sweat and tears at the workplace about which the taxman is not bothered). The company bears the cost of this premium. So, count it as a perk. But a normal option purchased from the stock market is tradable, while ESOPs are not. So it would make sense to apply an illiquidity discount to the theoretical value of the option to arrive at the taxable value of the perquisite.

But this is not the only cost the company bears in the case of ESOPs. The company has to deliver the shares when the ESOPs mature. The company cannot act like a normal option writer who would take forward positions on the stocks, whose delivery he undertakes at the strike price at the time of maturity. A company cannot trade in its own shares. The company would have to issue fresh shares from its authorised capital, typically from a chunk set aside for ESOPs.

The employee has to pay the strike price to the company to get his share. And that amount goes to the company as its share capital and reserves. So what is the benefit bestowed on the employee by the company?

If the company were to make a public issue or a preferential issue at the time ESOPs mature, there would be a particular price it could command for its issue. Sebi has a formula for preferential issue pricing. If the strike price, at which stocks are issued to employees under ESOPs, is lower than this preferential or public offer price, the difference would constitute the additional benefit bestowed on the employee. This can be taxed on par with taxation of stock issues to employees at the time of a public issue at a discount to the issue price to the public.

Capital gains booked by the employee subsequently flow from the ESOPs, all right, but are conceptually distinct from the benefit bestowed on the employee by the company. Such capital gains should be treated on par with other capital gains on the market.

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2017 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Our Vision

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions