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Fair market value for FBT on Esops may be a days work
September, 10th 2007
Taxmen are narrowing down their choices from their stock of options on finding the right price for taxing Esops. The employee stock option plan (Esop) valuation norms for listed companies are likely to rely on the opening and closing price of the scrip on the day Esop vests with the employee.

If the stock has not witnessed any trading that day, the last traded prices could be used as the fair market value (FMV). The fringe benefit tax (FBT) would be levied on the difference between the price at which the employee gets the option and FMV.The date of vesting of Esop will be the point of valuation and its exercise date will be the point of taxability.

In case of unlisted companies, the income-tax (I-T) department is considering a formula which will take the book value of the company as the base, and then use a multiplier that listed companies in the sector enjoy.

The book value is calculated by subtracting the companys liabilities (other than share capital) from its assets, and dividing the result by number of shares.To arrive at FMV, the book value is increased by a multiplier, benchmarked to the average earnings per share and share price of listed entities in that industry.

Valuation has never been an exact science. So it would be a challenge to come up with a very simplistic and easily understandable valuation model for unlisted companies, Ernst & Young partner Amitabh Singh said.

The income-tax departments work has been made harder by the fact that prescribing a multiplier for every industry may be difficult. In fact, the guidelines are being delayed because of this.Besides, arriving at a multiplier for a company which is present in two different sectors, say steel and IT, may become complicated.

The department could prescribe general separate multipliers for manufacturing and services companies to keep the calculations simple.

According to KPMG director Vikas Vasal, the fair market value of stock options should ideally be computed as on the date of vesting, as these are the options in the hand of employees and not shares.

However, the valuation of options is quite complex. Therefore, to keep the valuation simple, the government intends to levy FBT on shares. Keeping in view the erstwhile CCI guidelines and valuation rules under wealth tax, net asset value method or some other method or a combination of two or more methods may be prescribed, in case of unlisted companies, Mr Vasal said.

The fair market value arrived at for computing the value of fringe benefits will also be used for calulating the capital gain arises from the transfer of specified security or sweat equity shares.
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