There is unlikely to be much change in the finance ministrys Budget proposal to tax employee stock options (Esops).

According to sources, North Block is likely to stick to its original plan to bring Esops under fringe benefit tax (FBT), the incidence of which is likely to lay with the employer. Employers would have to pay 33.99% tax, but would have the option of passing on the tax liability to employees by including the charges in their salaries, sources said.
 
Also in keeping with the Budget proposal, employees would attract FBT only at the time of exercising the option. The tax will, however, be applicable from April 1, 2007, sources said.

The valuation norms for listed companies will be based on the rules of the Securities and Exchange Board of India (Sebi). For unlisted companies, the Central Board of Direct Taxes is likely to prepare a separate list of rules, sources added.

Finance minister P Chidambaram introduced FBT on Esops as part of Budget 2007-08, which would leave the burden of this tax on companies that issue stock options. Under the proposal, the difference in market value of shares, given under Esops, on the date of exercising the option and the price paid for the shares, would be treated as a gain.

Following the Budget announcement, the finance ministry has been evaluating various models for taxing Esops. It is likely to come up during discussion of the Finance Bill on Thursday. In their post-Budget representation, companies had suggested that the government should consider Esops as perquisites and tax employees at the time of their exercise.

They had also suggested that Esop taxation proposal should be prospective, i.e., tax options granted to employees only after March 1, 2007 should be considered for the purpose of taxation.

No sops to employees
Employers would have to pay 33.99% tax, but would have the option of passing on the tax liability to employees
Employees would draw FBT only at the time of exercising the option
The valuation norms for listed companies will be based on the rules of the Securities and Exchange Board of India