The Finance Act, 2007 changed the taxation of securities issued by an employer to its employees from April 1, 2007 (assessment year 2008-2009), by levying fringe benefit tax (FBT) on the employer in respect of securities, defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956, including Employees’ Stock Options (ESOP), and sweat equity shares, which may be allotted or transferred directly or indirectly to the employees (former or current) free of cost or at concessional rate for consideration other than cash for providing know-how, intellectual property rights or value additions.
The value of the fringe benefit (FB) shall be the fair market value (FMV) of the security or sweat equity shares on the date on which the option vests with the employee, as reduced by the amount actually paid by, or recovered from, the employee in respect of the security or shares. FMV is to be determined as per rule 40C of the Income-tax Rules, 1962 (Rules) notified on October 23, 2007. But, rule 40C of the Rules defines the valuation norms only for listed or unlisted shares and not other securities.
The rate of FBT on the value of such FB is 30% plus surcharge and education thereon.
Recent CBDT clarifications
CBDT issued Circular No 9/2007 dated December 20, 2007 clarifying certain matters relating to FBT on securities and sweat equity shares as under:
* Where shares are allotted or transferred by a foreign company to the employees of its Indian subsidiary, the Indian subsidiary (not the foreign company) would be liable to pay FBT. This would entail a cash and tax burden on the Indian subsidiary.Online GST Certification Course by TaxGuru & MSME- Click here to Join
* If shares are allotted or transferred by a foreign holding company to the employees of its Indian subsidiary and such employees are outside India at the time of allotment or transfer, then FBT would be payable by the Indian subsidiary, if such employee was based in or deputed to India at any time during the grant period (period commencing with the date of grant of the option and ending with the date of vesting of such option) irrespective of the place of location of the employee at the time of allotment or transfer of such shares. This is in alignment with the OECD view on cross-border income-tax issues arising from ESOP. Thus, employer would have to keep track of or record the movement of the employees during the grant period. Furthermore, in such cases,
only proportionate value of FB (value of FB in proportion to the length of period of stay in India by the employee during the grant period to the length of the grant period) would be subject to FBT. This gives rise to another problem of calculation in cases, where the employee has stayed in India for only a part (few hours) of the day.
* In the hands of the employee, the cost of acquisition of shares shall be the FMV on the date of vesting of the option as reduced by the amount actually paid by, or recovered from, the employee in respect of the security or shares, even when the employer is liable to pay FBT on the proportionate value of FB discussed above.
* If shares of a foreign company, listed outside India or unlisted, are issued by an employer to an employee, the FMV would need to be determined or valued by a Category 1 Merchant Banker registered with Sebi, which would be binding on the assessing officer. But, this increases the compliance requirements and costs of an employer.
* The benefits arising from issuance of ESOP to non-employees, including non-executive directors, would not be subject to FBT, but would be taxable as per the other provisions of the Income-tax Act, 1961.
* Where shares are allotted or transferred to an employee having different or multiple vesting dates, the First-In-First- Out (FIFO) method needs to be used.
* For an employer, just as FBT is not an allowable deduction, recovery of FBT from an employee is not income subject to income-tax. Similarly, for an employee, recovery of FBT by an employer from an employee cannot be added to the cost of acquisition of the shares in the hands of the employee.
The above CBDT circular provides much awaited clarifications on certain issues relating to FBT on ESOP.