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Govt urged to introduce levy on ESOPs with prospective effect
April, 03rd 2007

Industry bodies Ficci and CII have urged the government to introduce the levy on ESOPs with prospective effect. This means the fringe benefit tax (FBT) should apply only for ESOPs granted (not exercised ) on or after April 1.

As the levy of FBT at the point of exercise will result in unenvisaged tax liability in the hands of companies, the business plans of companies will be substantially vitiated due to the higher FBT incidence, CII said. Industry bodies have also demanded that employees, present and past, based in foreign offices be excluded from the ambit of FBT.

Ficci has demanded that ESOPs not be taxed as FBT in the hands of the employers but as perk or capital gains at the employee level. CII has pointed out that there was high possibility of the employer recovering FBT incidence from the employee.

It said such amount reimbursed by the employee to the employer be allowed to be added to the cost of acquisition while computing the capital gains at the time of sale of shares.

Ficci has also suggested that the difference between the market price on the date of the grant (not on the date of exercise) and the price at which the ESOPs are granted to the employees should serve as the basis for computation of FBT.

Industry bodies have suggested that Black Scholes method should be used for the purpose of valuation of ESOPs in case of listed companies and book value method for determining the fair value of shares in the case of unlisted companies. Black Scholes method determines the ESOP price based on several parameters including exercise price, present share price, volatility and dividend yield.

Ficci has also recommended that the taxable value of ESOPs for the purpose of FBT should be permissible as a deduction for computing the companys taxable income. Presently, different percentages have been prescribed for the purpose of valuation of fringe benefit on which FBT incidence will be applicable.

In view of the adverse impact on the carry-home compensation for the employees, CII has suggested a reduced weightage for valuation of fringe benefit in case of ESOPs at 20% for levy of FBT.

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