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December 24, 2007
Clarity at Christmas – Government clarifies
applicability of
Fringe Benefit
Tax on Employee Stock Options
The Indian Finance Act, 2007 introduced provisions
to expand the ambit of Fringe Benefit Tax (“FBT”) to include the
grant of Employee Stock Options (“ESOPs”)
by employers to employees. By
virtue of these provisions, an employer is liable to pay FBT at
the rate of 30% (excluding surcharge and education cess) at the
time of transfer of the security to the employees on the
difference between the fair value of the security at the time of
vesting and the amount paid by the employee.
The Government also introduced a provision
making it lawful for an employer to pass on the fringe benefit
tax liability to its employee. In
addition,
the Government recently introduced the
valuation norms for
valuation of securities,
which require foreign companies
and Indian unlisted companies
to appoint a merchant banker for valuation
of these securities.
While the newly inserted provisions
created havoc within the corporate community,
they also
gave rise to a lot of ambiguity on
the actual
application of the new law.
However, on December 20, 2007 the Central Board of Direct
Taxes
(“CBDT”)
vide Circular Number 9/2007 has sought to provide the
much awaited clarity relating to application of these new
provisions.
A summary and analysis of the key clarifications is
being enclosed below:
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Clarification provided |
Analysis |
| 1 |
A foreign company is
NOT required to pay FBT if shares
are allotted or transferred to employees of its Indian
subsidiary. The liability to pay FBT on such shares
vests upon the Indian subsidiary by virtue of the
employment of the Indian employees with the subsidiary
company. |
This clarification provides a breather to foreign
companies from the administrative hassles of payment of
FBT in India, however, the Government has not taken into account
the fact that the allotment or transfer of shares is
also by the foreign company, and not by the Indian
subsidiary, and hence there lies no merit in imposing
FBT on the Indian entity.
Further, the situation appears more problematic in
situations where the Indian entity does not intend
recovering the FBT from its employees, but also does not
have enough funds available to pay the FBT. |
| 2 |
Where an employee was based in India for only a part of
grant period, a proportionate amount of the value of the
fringe benefit will be liable to FBT.
The proportionate amount shall be determined by
applying to the value of the fringe benefit, the
proportion which the length of the period of stay in
India by the employee during the grant period bears to
the length of the grant period.
A similar calculation would be done for employees
deputed or transferred to India in the year in which the
shares were allotted or transferred. |
This clarification is in line with the OECD report
on Employee Stock Options, however it does not take into account
the fact that in case of an employee on deputation, even
if shares are transferred to the employee in the year of
transfer, the calculation should be with respect to the
length of stay in India during the grant period, and
nothing should be attributable in the event that
employee has not spent any portion of the grant period
in India, thus has not earned the stock option
from services rendered in India. |
| 3 |
An employer cannot claim a credit in India for taxes
paid by the employees in other countries.
However, in the event an employer recovers the
tax from the employees, effectively the employee would
have paid the tax and hence the latter can claim a tax
credit in a foreign country for taxes paid by the
employer in India. |
The Government of India while providing this
clarification, has recognized the fact that an employee
could be doubly taxed in the event he has to pay tax in
a foreign country, and an employer recovers FBT from the
employee. However, it has failed to recognize the fact
that claiming a credit in a foreign country would be a
subject matter of the laws of the foreign country, and a
credit may not be available considering that the tax
would actually have been paid by the employer. |
| 4 |
A foreign company listed outside India will have to
appoint a category 1 Merchant banker registered with the
Securities and exchange Board of India (“SEBI”) for
valuation of its shares.
The merchant banker can however use the listed
price as one of the basis of valuation and recommend the
best value. Further, an independent valuation carried on
by any foreign merchant banker/other experts recognized
in a foreign country will not suffice. |
The Government while clarifying that the listed price
can be used as one of the basis for valuation, has
increased the administrative costs for foreign companies
by imposing a condition of appointment of a merchant
banker in India.
In such a situation, it would have been more apt to use
the listed price as also used for Indian companies
listed in India. |
| 5 |
FBT is not payable on stock options granted to
non-executive directors or non-employees. |
This clarification is a welcome move, especially in
light of the fact that many companies do issue stock
options to consultants, and non-executive directors. |
| 6 |
It is binding on the assessing officer to accept the
valuation by the merchant banker, unless it is perverse. |
This is a welcome clarification, which will go towards
reducing tax litigation. |
| 7 |
Amount recovered as FBT is not taxed in the hands of the
employers. |
This is also a welcome clarification, which will provide
relief to the Indian corporate employers. |
| 8 |
The valuation rule shall apply in all cases where
specified security or sweat equity shares, being shares
in a company, are allotted or transferred to an employee
under “Employee Stock Purchase Plan”, or “Employee Stock
Option Scheme”, or “Employee Stock Ownership Plan”, or
“Employee Stock Purchase Scheme”, or “Employee Stock
Option Scheme” or “Employee Appreciation Rights or
Plans” |
While this clarification details the different types of
Plans which get covered within the purview of FBT, it
does not however clarify FBT implications
in case of reverse vesting of stock options. |
While some of these much awaited
clarifications may not have lived up to the expectations of the
Indian corporate community, they are still a welcome move which
will reduce the currently existing ambiguity on the
applicability of FBT on ESOPs.
Source:
Circular No. 9/2007, Dated 20-12-2007
Hotline dated October 24, 2007
"Finally…
rules for valuations of securities and shares for payment of FBT
announced"
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