What is evident on the face of it, is that IT companies may even end up paying FBT on account of employees who are no longer in their employment, because the tax becomes payable only when the stock option is exercised. Also, ESOPs are given in lieu of wages, but they are not tax deductible although wages are. Worse, since companies have no way of predicting how their share price will perform, they have no way of planning for the incidence of tax when the ESOPs are exercised. These are just a few of the serious flaws in the application FBT to ESOPs.

Curiously, however, unlike cement and steel company stocks, IT shares have not been rocked in the post-budget market turbulence, with every new interpretation of the implication of the tax on ESOPs. Maybe investors have not quite understood the tax implications or believe that the industry will be able to persuade the FM to change the rules.

It could well be a false hope. After all, the FM has persisted with the draconian and illogical FBT, which is really an expenditure tax in the garb of an income tax. The government is hell bent on gouging this ‘tax’, whether or not a company has earned a profit. In fact, even a year after it was introduced, the finance minister has neither sympathy nor understanding for the problems of smaller companies as regards the FBT.

Meanwhile, the growing liquidity squeeze has dealt them a further blow in the form of rising interest rates. In comparison, the IT industry has been having such an easy ride in relation to taxation, that it is seriously irking a host of other businesses who believe that their contribution to the nation is no less significant that the software sector. So, no matter how valid its arguments, it is difficult to predict that the IT industry has a better chance of convincing the FM to rollback his proposals. Logic dictates that employees, who benefit from ESOPs and choose when to cash them in, would be willing to pay a reasonable tax on their gains.

... contd.