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FBT on stock options: Sacrificing equity for the sake of convenience
April, 10th 2007
Is ESOP (employee stock option plan) a `fringe benefit' or a perquisite (salary)?

"Answer to this question should have held no terrors before the introduction of Finance Bill, 2007," says Mr V. Ranganathan, a Chennai-based chartered accountant. "Whether tomato is a fruit or a vegetable has been a vexed question, long eluding a botanically convincing reply, essentially due to forces of nature that made tomato what it is."

"Is the lawmaker in India invested with such supernatural qualities to cause such confounding that can have only one answer in any other part of the world?" he asks in return, and fumes: "It is a untoward act of distortion that ESOP has been characterised as a `fringe benefit'."

Here's more that Mr Ranganathan has to say, in a quick interaction with Business Line.

On the levy

`Fringe benefit' tax as it came to be introduced by Finance Act, 2005 is essentially an anathema to the concept of income based taxation, and is an expenditure tax under the thin and transparent veneer that passes as a taxation of collective benefits that cannot be identified to specific beneficiaries. Paragraph 160 of the Budget Speech of 2005 clearly provided this objectionable excuse to usher in a system of taxation that exists in remote corners of the world, but in a more acceptable and saner form. The introduction of the superannuation contribution in FBT was the first stroke of provocation that met with not strong enough opposition then, and has come to stay in the law.

On ESOP coming within the FBT net

The attempt to introduce ESOP in FBT is a clear affront to the concept of `fringe benefit' and perhaps to the intelligence of corporate taxpayers. Considering the irrationality of the move, it almost seems like a signal of defiance from the Government of doing what it feels correct. I do hope that it will pay heed to the concerns voiced by taxpayers.

Why so?

ESOP is a more direct and employee specific benefit than any other form of remuneration and it is only a convenient instrument to link performance to the actual result, being the value created (stock prices). The issue needs no argument and it would be illogical to deem ESOP to be anything other than salary taxable under section 15 of the Income-Tax Act, 1961.

On the raison d'tre

None. The proposal is an aberration which comes across as a poor legislation. The approach of taxing income at the headline rate in the hands of the person actually disbursing it is turning the concept of income tax on its head. This is a major compromise in the system of taxation that sacrifices the principles of equity and progression for the sake of convenience.

D. Murali

 
 
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