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Indian arms of MNCs to pay FBT on Esops
April, 17th 2007

Indian subsidiaries of multinational companies (MNCs) like Coca-Cola, Adobe and Dell which offer their employees stock options in the parent companies abroad are in for some taxing times. They would foot the fringe benefit tax (FBT) bill for the option they give their employees to acquire stocks in the parent company.

These employee stock options (ESOPs) are given in the parent company as these multinationals are not listed in India. However, the finance ministry has held that the tax liability on these stock options issued by the multinationals would have to be borne by the Indian subsidiary. Indian employees get Esops in the parent company because of their employment in the Indian subsidiary, an official said adding that this would make the Indian subsidiary liable to FBT on Esops.

The government is expected to clarify on the issue when it brings out guidelines on how FBT would be levied after the passage of Finance Bill, 2007.

However, the official said even without any fresh clarification, the master circular on FBT issued in 2005 after the introduction of the tax clearly states that companies would have to pay FBT for all fringe benefits bestowed on their employees based in India.

However, this would create an anomaly for companies whose home countries tax Esops in the hands of employees, as part of the compensation they receive from their employers. Such MNCs would pay tax on Esops granted to employees in India, but not on Esops granted to employees in their home countries. In case the Indian government accepts the IT industry demand to tax Esops as perquisites in the hands of employees, the anomaly would disappear, without the government suffering any loss of tax.

The master circular on FBT lists has employee based in India as one of the conditions for levying FBT on a company. The official said this principle would be applicable in this case as well where Indian employee of a subsidiary of a multinational, working in India has been awarded Esops of the parent company, as the employee is based in India. However, if the employee is based overseas, then the company will not be liable to pay FBT.

Esops are usually treated as a perk and are taxed in the hands of the employee in most developed countries, albeit in different forms. India has opted for taxation at employer end as it makes collection easier. Employers who give ESOPS to their employees would have to pay FBT at the rate of 30%.

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