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NOTIFICATION NO 11/2008, Dated: January 18, 2008 Valuation of specified security not being an equity share in the company. 40D. For the purposes of clause (ba) of sub-section (1) of section 115WC, the fair market value of any specified security, not being an equity share in a 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 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.
VALUATION of perquisites has always been a bone of contention. To overcome many of such irritants, the Finance Minister in the Finance Act, 2007 had inserted a deeming provision to define concession in the matter of rent for the purpose of determining the perquisite value. It has also reduced the rate of valuation of perquisite in the nature of concessional rent accommodation and leased accommodation with retrospective effect from 1 st day of April, 2006, that is with effect from assessment year 2006-2007. This had necessitated similar reduction of rates in case of both rent-free and concessional rent accommodations and leased accommodation in Table I of rule 3 with retrospective effect from 1 st day of April, 2006, that is in relation to assessment year 2006-2007 and subsequent years.
The Central Board of Direct taxes have extended the last date of filing of income tax /fringe benefit tax returns due by 31st October 2007 as follows:- For electronic returns (companies, and firms requiring tax audit u/s 44AB) to 15th November 2007; and For paper returns (other than those required to file electronic returns) to 2nd November 2007. It is further clarified that the dates for obtaining tax audit report under section 44AB of the Income Tax Act have also been extended accordingly.
We have identified and appropriately classified all such payments/expenditures, which are subject to fringe benefit tax in terms of sections 115WA and 115WB of the Income-tax Act, 1961. There are no unrecorded payments/expenditure which would have otherwise qualified for being subjected to the fringe benefit tax. We acknowledge that we are responsible for the compilation of information in Annexure-II to Form No.3CD. We shall not hold you liable, in case if we incur any tax liability on account of any errors/omissions/mistakes taken in the Annexure-II to Form No.3CD.
The taxman may have to consider naming some top ten stock exchanges around the world as ‘recognised stock exchanges’ for the purpose of Rule 40C, suggest Mr Sanjiv Agrawal and Mr Amitabh Singh, Partners, Ernst & Young, commenting on the new income-tax rule on thevaluation of ESOPs (employee stock options) for the purpose of FBT (fringe benefit tax).
Does the FBT law intend to cover securities under SCRA? I don’t think so. We have to look at the rationale of levy of FBT. In a booming economy, accompanied with a vibrant stock market, corporates have figured out a creative way to compensate their employees through the ESOP scheme. It could be ESOP of a listed company or an unlisted company. Using the horizontal equity argument, a case was made out by the legislative to tax that portion of the gain, which an employee receives or accrues to him as a result of his employment. The basis of charge is the difference in the value of the security (as at the date of exercise) and price paid for such exercise, levy being on the vesting date.
As you may be aware, the Finance Act, 2007 amended the provisions of the Income-tax Act, 1961 to provide that employers will be liable to pay FBT (fringe benefit tax) on the value of ESOPs granted to employees as and when the ESOPs were allotted or transferred to the employees. The value of ESOPs for the purposes of levy of FBT shall be the FMV (fair market value) of the ESOPs on the date of vesting of the options as reduced by the amount actually paid, or recovered from, the employee. On October 23, the Central Board of Direct Taxes (CBDT) notified the insertion of Rule 40C in the Income-tax Rules, 1962, specifying the computation of FMV.
NOTIFICATION NO. 264/2007, DATED 23-10-2007 Valuation of specified security or sweat equity share being a share in the company. 40C. (1) For the purposes of clause (ba) of sub-section (1) of section 115WC, the fair market value of any specified security or sweat equity share, being an equity share in a company, on the date on which the option vests with the employee, shall be determined in accordance with the provisions of sub-rule (2) or sub-rule (3).
How is the FBT to be valued? And when is the tax payable? The fringe benefit is to be valued at the fair market value (FMV) of the security or sweat equity share on the date of vesting of the option minus any amount paid by / recovered from the employee for such security or shares. The FMV is to be determined a s per the method to be prescribed by the Central Board of Direct Taxes (CBDT). The employer company is required to pay advance tax of estimated FBT progressively: 15 per cent by June 15, 45 per cent by September 15, 75 per cent by December 15 and 100 per cent by March 15 of the fiscal year.
