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Closing price on vesting day may fix FBT on Esops
July, 20th 2007

The finance ministry may settle for the closing price of shares of a listed company on the stock market on the day the scrips are vested with employees to decide valuations for the fringe-benefit tax (FBT). The ministry will soon issue guidelines on how to arrive at fair market value of shares given to employees, for assessment under FBT.

For listed companies, this is the standard valuation norm used by Sebi as well, said Mr Amitabh Singh, tax partner at Ernst & Young.

For unlisted companies, since their shares are not traded, the finance ministry may use guidelines set by the erstwhile Controller of Capital Issues (CCI) and tweak them a bit. The CCI had prescribed two methods for arriving at the fair market value for unlisted companies--profit earning capacity value (PECV) and net asset value (NAV).

Under the PECV method, the fair market value depends on estimated profitability of the company in future, taking into account various factors such as type of industry, economic risk and the expected future contracts. The NAV method calculates the fair market value by dividing the net worth of the company by the number of its shares.

Commenting on the move, Divya Baweja, tax partner, BMR& Co, said, The CCI guidelines were also used by RBI for valuation of shares. The exact impact of the guidelines, however, will be understood only once the government finalises and issues them.

Valuation Riddle
Listed companies
For listed companies, standard valuation norm used by Sebi to fix fair market value
Unlisted firms
For unlisted companies, finmin may tweak Controller of Capital Issues guidelines on using PECV and NAV methods
North Block could come out with the guidelines by mid-August, well in time for the second instalment of advance tax payable by September 15. It has already postponed the date of paying the first instalment of advance FBT on Esops to September 15 from June 15, as companies were unable to estimate the tax liability due to the lack guidelines for estimating fair market value.

Finance minister P Chidambaram had announced in Budget 2007-08, that FBT would be levied on Esops.

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