The Finance Minister, Mr P. Chidambaram, on Monday virtually ruled out a rethink on the Budget proposal to levy Fringe Benefit Tax (FBT) on employee stock option plans (ESOPs). He also rejected industry's contention that a tax on ESOPs would affect their ability to retain talent.

"The argument that tax on ESOPs affect the ability of the company to retain talent is misplaced. It is applied across the board. It is not that one kind of company will suffer tax on ESOPs and the other kind of company do not suffer tax on ESOP," Mr Chidambaram told industrialists at FICCI's national conference on Union Budget for 2007-08 here today.

Mr Chidambaram said that whoever hires a person and gives him ESOP has to pay a tax.

Argument `misplaced'

"Tax on ESOPs would apply uniformly. How does it affect Company A's ability to retain somebody and how does it enhance Company B's ability to attract somebody? It applies uniformly. Wherever you give ESOP, the ESOP has to be taxed," he said.

The Finance Minister, however, invited inputs from industry on how ESOPs should be valued for the purpose of taxation.

"We think that ESOP is a fringe benefit. We have taken power to tax ESOPs as fringe benefit. The method of valuation would be worked out in due course and we welcome your inputs on how ESOP should be valued for purpose of taxation," Mr Chidambaram said.

The Finance Minister was responding to the FICCI President, Mr Habil Khorakiwala's request that the Government should rethink its Budget proposal to levy FBT on ESOPs.

On FICCI President's concern over the cascading effect of the dividend distribution tax (DDT) and therefore the plea to reconsider the hike in DDT, Mr Chidambaram pointed out that there is bound to be a so-called "cascading effect" so long as corporates maintained layered structures.

"What is different in the so called cascading effect of either dividend tax or DDT? As long as you have layered structure, there is bound to be so called cascading effect. Shall we get rid of DDT and reintroduce dividend tax? It was tried in 2002-03, but quickly the government of the day reverted to DDT the next year. If you have a layered structure, the dividend tax would still be applied to layered structure," he said.

The Finance Minister also defended the Budget proposal to levy service tax on rents of commercial properties. "Service tax in India is equivalent of GST or VAT worldwide - a tax on value addition. GST/VAT on rental of commercial properties is in force in all European countries, the UK, Canada, Australia, China and New Zealand," he said.

He also said that the effective rate of corporate tax at 19.2 per cent was low and felt that this has to go up even as schedule rates could be moderated. "We want taxes to be moderate. Moderation (surcharge removal) has already been applied for small and medium companies this year. About 12 lakh firms would benefit. That is an indicator of the line we are pursuing."

Mr Chidambaram also said that there was a case for bringing more kinds of research and development expenses (from various sectors) for weighted deduction under the income tax law.