This amendments would come into effect from April 1, 2008. This is done by deleting a clause, which specified that for valuation of Esops for FBT, equity share would be defined according to section 85 of the companies Act, 1956.

The Central Board of Direct Taxes (CBDT) has now deleted the clause (f) in sub rule (4), Rule 40C of Part VII C of the Income tax Rules, which lays down guidelines for FBT. This clause had caused considerable confusion as section 85 dealt only with Indian companies and multinational companies were unsure of how to pay the tax. This would help foreign companies in dealing with their FBT liability.

Section 85 had led to confusion and different interpretations for the meaning of equity shares. With the deletion of section 85, it has been clarified that the natural meaning of equity shares as used in business terms will hold good, Vikas Vasal, executive director, KPMG, explained.

Simultaneously, the CBDT has clarified that specified security not being an equity share in a company will also come under the FBT net. The CBDT has now inserted clause 40D, which provides valuation rules for specified security, which are not an equity share in a company.

Simply put, this means along with equity shares, other similar instruments such as warrants, debenture shares, etc given to employees under Esop plans will also come under the FBT net.

The fair market value of any specified security, not being an equity share in the company, on the date on which the option vests with the employee, shall be such value as determined by a merchant banker on the specified date, the amendment said.