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Half-baked Esops won't escape FBT
May, 10th 2007
This could come as a dampener to all those companies that rushed their employee stock option plan (Esop) offers before March 31 to avoid fringe benefit tax (FBT). The finance ministry has clarified that FBT will apply on all Esop offers where the physical transfer of shares was completed after March 31 though the employee may have exercised the option in that month itself.

Companies that offered Esops to employees in March include Satyam Computer Services, Geometric Software, Dabur Pharma, i-flex Solutions, Hexaware Technologies, Moser Baer, HDFC and NIIT, among others. Some of them may have failed to conclude the transfer of shares by March 31.

A case in point is HDFC, where the stock exchange was informed about the Esop offer only on March 15 and 29. Tax consultants say companies usually take about one to two weeks to transfer shares to employees once the option is exercised.

In cases where trusts are custodian of shares, share transfer may take some time, and companies, if they have allotted shares close to the end of March, may find themselves in the FBT loop.

However, a large number of companies, especially in the IT sector, conduct the whole process of allotment and transfer of shares under Esop scheme online. These companies will not fall under the FBT ambit if the whole transaction has been completed within the March 31 deadline, said CA firm BSR & Co director Sandip Chaufla.

The finance ministrys clarification thus means that all those companies that failed to physically transfer shares to their employees before March 31 will now have to pay FBT on the offers. Incidentally, the Budget has allowed employers to recover these tax liabilities from the employees.

FBT will be levied at the time of allotment or transfer of share under Esops. Thus, in all those cases where shares under Esops were transferred after April 1 even though option was exercised before March 31, 2007, companies will have to bear FBT, a government source said.
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