Centre should ponder over the irksome FBT

On the 10th anniversary of what was billed the dream budget, the devil in the details continue to confound different sections of industry, not merely steel and cement manufacturers. Meanwhile, the middle class is fuming at rising local and central taxes, levies, tariffs as well as lack of infrastructure (read sadak, bijli and paani); the poor (read aam admi) are battling Inflation for two square meals and suicidal farmers are either fighting off the debt trap or struggling to keep their land safe from various state governments who want to give it away to rich industrialists for their Special Economic Zones (SEZ).

In this environment of discontent, one believed that the thriving, well-paid and completely tax-free Information Technology (IT) sector has less to complain about, even though companies will have to pay the hated Fringe Benefit Tax (FBT) on Employee Stock Options (ESOP) at the time they are exercised. Apparently, the IT sector is also desperately harried. The head of a recently listed company told me, “If all my employees decided to exercise their ESOPs (Employee Stock Option Plans) around the same time, my entire profit will be wiped out in paying FBT. The industry has already made a representation to the finance minister for reconsideration of the tax.

Essentially, the Government has decided to apply FBT to the spread on stock options at the date of exercise. As Sridar Iyengar, former chairman of KPMG India and now independent venture capitalist has argued in a column, “No one seriously believes, even in Silicon Valley, that stock options are NOT for services and therefore prima facie they are a component of overall compensation. So, yes, some form of taxation is appropriate. But what should be the amount of the attributed income, who is the taxpayer, what tax regime it falls under — income, capital gain — its timing, calculation and amount should all be carefully considered before proposing the tax”. But the government has gone ahead and proposed the tax and kept the industry on tenterhooks while it figures out the rules, their consequences and application.

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.

... contd.

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