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FBT on Esops to hit small cos harder
March, 26th 2007

Even as the Indian IT heavyweights are involved in hectic parleys with the finance ministry over fringe benefit tax (FBT) on Esops, it is the 5,500-odd small and medium IT companies that are struggling to come to terms with its ramifications. Some small companies which had decided to give Esops are now doing a rethink.

"We had planned to list ourselves in next 12 months. We have doled about 7% our equity in options but now we are struggling to see how we can get that right before we go for a listing," said Rajiv Mittal, vice-president, strategic planning JK Technosoft.

We had decided to dole out 15 lakh Esops to our employees with five lakh Esops over next three years. But with the FBT coming into play, we are thinking of rolling it back, said Sanjiv Bhavnani, CEO and MD, Visesh Infotecnics.

The finance ministry has imposed FBT on Esops in the recent budget. While the exact modalities and guidelines are being finalised, the most painful point on which FBT will pinch is talent retention. SME IT companies are already reeling under staff crunch and thwarting employee-defection to established players. FBT on Esops is going to hit them further.

"Mid cap and small cap IT companies cannot pay as much as MNC giants. They cannot offer brand value, as well. The only way they can attract talented employees is by giving a share in the company and showing them a dream of becoming a millionaire in two years once the company goes in for listing. But FBT may take that away, as well, said SL Ananthanarayan, CFO, Birlasoft.

Another company Eastern Software Systems (ESS), which is eyeing revenues of Rs 20 crore this fiscal, has dished out 5-7% of the equity in Esops. "The tax outgo will flow out of net profits and impact the cash flow of the company and reduce the profits.

We have to see if we can counter this by passing on the costs to employees, which again will be an unpopular move," said Anil Bakht, CMD of ESS, where Esop schemes cover 15-20% of employees.

Some companies are not yet clear who will bear the brunt of FBT on Esops the employer or the employee. Either way, FBT is going to hurt the industry," Mr Ananthanarayan added.

"We normally dole-out 3,00,000 options every year. Currently, we have about 15 lakh un-exercised options vested with our employees. An FBT on Esops will hit our net profit margins by 1-1.5%," said Jamshed Jussawala CFO Mastek.

According to industry experts, FBT on Esops may also breed unfair practices. Unlisted companies may issue options at jacked up valuations to minimise the difference on which tax will be levied.

Nasscom president Kiran Karnik said that all tax provisions in budget this year have been harsh on IT SMEs. Be it minimum alternate tax (MAT), service tax on leased land or FBT on Esops all provisions will hit SMEs hard. Small companies generally operate on leased land due to cash constraints or uncertainity over future expansion. Service tax on leased commercial land will hit them."

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