TDS on RSU on Vesting & Capital Gains Tax on Sale of Vested RSU – A CRITIQUE

PROLOGUE

Presently RSU (Restricted stock unit also known as Sweat Equity) allotted by a foreign grand parent company, free of cost to employee of Indian subsidiary, is being taxed as ‘perquisite’; and for the purpose, the FMV of the ‘vested units’, as on the date of vesting, is considered as the taxable perquisite value.

If were to be critically examined, it may be realised that the matter entails debatable issues and nonissues alike. Those, however, so far as known, have thus far been left unaddressed and unchallenged.

Be that as it may, the utmost necessity to take a conscious note of and decide to have a fresh look through and take on the matter in the best possible manner has now cropped up. That is because of the worldwide economic recession and its adverse impact on the stock market in recent months; in turn, the adverse impact on the  rights /interests of the salaried class. Simply echoed, the holders of RSU benefit have been pushed to the brink of suffering a tax loss. In other words, the question for finding an answer is, – as to how best to extricate RSU (benefit) holders from the actual loss and / or save them from a potential loss?

> Actual loss – Tax Loss suffered by those who have sold the vested RSU for a price lower than that taken for TDS on perquisite value

Potential Loss- Imminent tax loss if the present rule of evaluation of perquisite on the basis of MV or FMV is not effectively challenged and the law is left unchallenged but continues to be followed.

2.1.  For resolving the points of issue and getting out of the piquant situation faced with, the fundamental concepts -mutually conflicting and undeniably distinct as indicated, – call for a concerted  focus :

A. ‘RESTRICTED STOCK UNIT’ X ‘EQUITY SHARE’

B. ‘VESTING’ X ‘TRANSFER’

 2.2.  At the point in time of allotment – being coterminous with vesting, – RSU allotted free of cost actually and factually entails no cost to employee. In other words, employee cannot at all, by any sane reasoning or logic, whatsoever, could be rightly regarded to have incurred any cost (either in cash or in kind) for acquiring the asset (RSU). Conversely, neither the foreign company allotting RSU nor the Indian-employer company could be rightly regarded to have incurred / met any cost for providing the benefit to employee. On this ground alone the practice of deducting tax at source on RSU is reprehensible and highly contestable.

Passing here for a moment, it needs to be noted that under two of the other employee benefit schemes in vogue,-  namely, “ESOP” and “ESPP”, no such situation will arise; for, the shares issued or purchased are, by and large, for a pre-determined price – Yes or No ?!?

2.3. In any view, imputation of a value or taking ‘market value’ (MV) or ‘fair market value’ (FMV) as perquisite value of RSU is, in my firm conviction,  palpably misconceived.

2.4. Notification, as mandated by law has, – so far as known or ascertained, not been issued for calculating FMV!

For all these reasons and on certain other equally valid grounds, in one’s own independent firm view, founded on courage of conviction, now is the time to have an insightful fresh look through and take a conscious decision on the course correction as apparently warranted.

2.5. Other related rudimentary points to similarly focus on:

Perquisite Value-

a) is clearly / unequivocally taxable under the head of ‘salaries’; not under any other head of income;

b) could be taxed only as part of salary, in the very same tax year in which income from salaries is taxed on accrual or receipt basis; not in any earlier or later year;

c) residential status of employee is required to be determined as per the domestic law. For the said purpose, also the applicable/corresponding tax treaty provisions ought not to be sidestepped but need to be necessarily kept in sharp focus and given due consideration.

3. It might be worthwhile to have in the backdrop, for clues and guidance , the past events, etc., drawn attention to below:

ITAT Order in HDFC Dubai based employee’s case

In the Article displayed on the professional website of Taxguru.in –

Link > https://taxguru.in/income-tax/itat-order-taxability-esop-dubai-based-employee-hdfc-bank.html

also the comments posted thereunder, may be gone through.

Aspects requiring special focus:

That was the case of an Indian citizen and employee of Indian company .

i) His status, as per the Indian tax law (IT Act), was that of a ‘non-resident ‘;

ii) He derived /earned his salary income, including ESOP benefit granted by HDFC, for performance of his duties of employment in a foreign country -UAE; hence was, if at all ,taxable only in that country.

iii) In terms of the tax treaty between India and UAE, however, the employee had no liability and, therefore, paid no income tax on his salary income in Dubai.

iv) Though, not at all required, HDFC, as the Indian employer, voluntarily paid TDS on the perquisite value (‘market value’) of ESOP, to the Indian Revenue and recovered it from employee’s salary. That gave rise to a dispute with the Indian Revenue.

Aside: Despite personal efforts repetitively made and pursued, regrettably no information could be obtained on the final outcome of the dispute in that case.

4. As per information come across or gathered, instances with following factual matrix and practice are found to be not wanting:

– Employee of Indian company’s status, for Indian Tax, is that of a ‘resident’.

-He derives /earns his entire salary income in India. That includes perquisite value of RSU of the Group Holding company in US.

-TDS on the perquisite value of RSU is calculated on the basis of US Stock Market Quotation.

– That is paid to the Indian Revenue by the US company and gets duly reflected in the TDS certificate issued by the Indian employer- company to its employee.

It is unclear, rather extremely puzzling, –

a) as to why the US company was right in resorting to TDS on the perquisite value of vested RSU; and

b) moreover, for the purpose, has adopted the US stock market quotation.

In retrospect, more so by wisdom left to be gathered even in hind sight, the US company seems to have acted exclusively on the basis of the largely prevailing practice of being on a conservative basis. It is not known whether or not, the operating companies have taken and followed any legal opinion obtained from a duly competent law firm either in US and/or India.

To reflect upon the field reality, everyone, he be a CA or lawyer in field practice ,wants to play safe by taking a conservative view ; mainly so in order to avoid any confrontation with the Revenue.

Having decided and accordingly paid TDS, by erring on a wrong side, the US company has nonetheless considered it prudent to have the Indian employee cautioned that he should for his tax return and other purposes may have to independently take and go by what his own engaged consultant advises! Whether Indian employees ever took the caution any seriously is left to anybody’s guess .

To digress for a little while:

Though it has been very often said that common sense is a stranger and an incompatible partner to the Income Tax Act and it is also said that equity and tax are strangers to each other, still judicial view in decided cases has been that in any given case, resort must be had to ‘purposive interpretation’ of the applicable provisions of the law; not a rigid or straight jacketed construction, which may have the result of defeating the very object/objective of legislative enactment (s).

5. In the currently obtaining scenario narrated as above, one is obliged to insist that it is time now to get an intimate grip and insightful understanding of the fundamental concepts referred to herein before.

For any useful help of eminent guidance, if diligently searched for, copious material might be found to be available, mostly for free, in public domain, in varying forms,- Articles, Comments Posted, etc., etc.

5.1. On the strength of my take aways, will dare and suggest to look through the following :

A. Conversion of One Business Entity To Another- Tax Implications

B. Reduction of Equity Share Capital – Tax Implication (A Supplement)

C. Comments posted @- https://taxguru.in/income-tax/employee-stock-option-plan-unlisted-company.html?fbclid=IwAR2pNvj1P14XKauRPY_vTCPe6Vm4-INn52CRWqL-allnHU826BnvHvNCFmo

5.2. Most of such related issues may be found substantially covered by a number of decisions of the Hon’ble Supreme Court as well of various High Courts of the country. The base decision is in the case of CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 wherein the Hon’ble Supreme Court has held that all transactions encompassed by section 45 must fall within the computation provisions of section 48.

6. In own perspective, this brings to sharp focus the validity or otherwise (rather, sanity or logic) of -the so called, – “FMV”, which is required /mandated to be taken as a certain and standard concept and being adopted for taxation -IT and IDT!?

Strictly viewed, however, an exercise to assess FMV/FV will be called for, only if actual cost of acquisition (also as indexed as per the law), is not known or ascertainable. That could mostly be the cases in which the asset is not paid for and purchased, but inherited /succeeded to. Even in that instance, in normal circumstances, such an exercise will become unavoidable; but that could only be as an exception not as a rule.

EPILOGUE

The Revenue’s stance, upheld by the itat in HDFC employees case (supra) seems to have had the indelible but unsavoury effect of making inroads into the thus far prevailing legal position on the basic objective and tax treaty implications of   ‘avoidance of double taxation’.

In this context, the idiom- ‘Devil is in the details’ # comes to mind. Nonetheless, if were to go by the field reality, it is primarily because of the inborn/natural fear of the proverbial Devil , that in our Modern Times we (homo sapiens), in any walk of life- mainly ‘PROFESSIONALS”, do not wish or want to go into ‘DETAILS’. Most likely that is the causa causans of the prevailing sad state of affairs in, among others the ‘legal system’ (in its comprehensive sense/meaning) – in most countries, ours being no exception.’

# ” The devil is in the details ” is an idiom alluding to a catch or mysterious element hidden in the details; it indicates that “something may seem simple, but in fact the details are complicated and likely to cause problems”.

Disclaimer: A quick attempt has been made herein simply but sincerely to share own viewpoints, in brief,  on the chosen Topic . The primary objective is to try, provoke and motivate the co-professionals at large who, unlike me, are actively engaged in law practice.

Time and mind permitting, may come out with a supplement to cover in greater details any one or more of the thoughts and viewpoints briefly set out herein before. Anyone with usefully insightful thoughts of ‘value’, in a like vein to share, are invited for serving, even remotely, the purpose of life on our planet!?!