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FBT on Esops likely to be based on asset valuation norms
June, 07th 2007

The finance ministry is likely to use the asset valuation norms to arrive at the fair market value of shares to calculate the fringe benefit tax on employee stock options (Esops). These norms are used by the income tax department to estimate the net worth of a business,Going by the Wealth Tax Act, the net value of the assets of a company is arrived at by dividing the networth of the company by the number of shares issued.
 
This valuation norm can be used both for listed as well as unlisted companies to arrive at the fair market value for giving Esops. While the market value may vary a bit, the method will give a fair idea of the stock price and will not be less than this, a finance ministry official said

Using this method, FBT can be levied on the difference between the fair market value of a stock on the date of vesting an option and the cost of the stock options for the employee. The date on which they are exercised would be the point of taxability and valuation would be done on the day the options are vested with the employee.

Fair Share
This valuation norm can be used both for listed as well as unlisted companies to arrive at the fair market value for giving Esops
With this, FBT can be levied on the difference between the fair market value of a stock on the date of vesting an option and the cost of the stock option
 
Tax experts, too, agree. Divya Baweja, partner, BMR & Co said: This is one of the ways that can be used to arrive at the fair market value of Esops. The finance ministry may decide to give a few options for calculating the value. Companies, especially unlisted ones, can get a valuation certificate specifying the method used.

Finance minister P Chidambaram had mooted the proposal to bring Esops under FBT. However, the Central Board of Direct taxes is yet to come out with a circular defining the method to arrive at the fair market value. At present, the CBDT is exploring various methodologies such as guidelines issued by the Securities and Exchange Board of India and the Black and the Scholes method to arrive at a possible solution.

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