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No FBT on Esops for overseas staff
March, 22nd 2007

India Inc need not worry about paying fringe benefit tax (FBT) on Employee Stock Option Plans (Esops) of employees posted overseas. The government is likely to clarify that FBT on Esops will not apply to employees who have been sent abroad.

The clarification will resolve the confusion over applicability of the tax. As the FBT law stands now, it is already clear that the tax will not be imposed if the employee is not employed in India, a finance ministry official said. However, the official added that the government may further clarify the matter if confusion persists in industry on this issue.

The Central Board of Direct Taxes had issued a detailed circular on FBT in 2005 when the tax was introduced, the official pointed out. The circular, which had explanations in the form of questions and answers, mentions has employee based in India as one of the prerequisites for levy of FBT on a company.

Industry, especially IT, where Esops are a popular tool to retain employees have expressed apprehensions about double taxation in case the employee is posted abroad. Most countries tax Esops at the hands of the employee and do not recognise the tax paid by the employer. They point out that an Esop may get taxed twice, once at the hands of the employer in India and then at the hands of the employee in another country.

Budget 2007-08 had extended FBT to Esops, designating the stock options as a fringe benefit. Employers who give Esops to employees will have to pay FBT at the rate of 30% when the option is converted into shares.

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