The Hindu Business Line : Norms issued for stock options valuation

The Budget had specified that the value of ESOPs for the purpose of levy of FBT would be the fair market value on the date of vesting of the options

Our Bureau

New Delhi, Oct. 23 The Finance Ministry on Tuesday brought out guidelines for computation of fair market value (FMV) of employee stock options (ESOPs) for the purpose of levy of fringe benefit tax (FBT).

Budget 2007-08 had specified that the value of ESOPs for the purpose of levy of FBT would be the FMV of the ESOPs on the date of vesting of the options as reduced by the amount actually paid or recovered from the employee.

The Finance Ministry has now spelt out the computation guidelines for FMV on the basis of whether the shares in the company, on the date of vesting of the option, are listed in a recognised stock exchange or not.

Guidelines

In cases, where the shares of a company are not listed in a recognised stock exchange, the Central Board of Direct Taxes (CBDT) has said that the FMV would be the value of the share in the company as determined by a merchant banker on the “specified date” (date of vesting of option or any date not more than 180 days earlier than the vesting date).

For shares of company that is listed in a recognised stock exchange, the FMV would be the average of the opening price and closing price of the share on the vesting date on that stock exchange. In situations where, the shares are listed in more than one recognised stock exchange, the FMV would be the average of opening price and closing price of the share on the recognised stock exchange which records the highest volume of trading in the shares.

‘Prone to challenges’

Many tax experts contended that valuation by a third party, merchant banker in the case of unlisted shares, would lead to subjectivity and prone to challenges.

“Valuation by merchant bankers would be prone to challenges. The subjectivity does not help. We were expecting the rules to prescribe the valuation method. For example, the wealth tax rules had specified specific methods for valuation of unlisted shares,” Mr Govardhan Purohit, Executive Director, PricewaterhouseCoopers, told Business Line.

Mr Assem Chawla, Tax Partner, Amarchand & Mangaldas, said that industry and business community were widely anticipating, in addition to the new rules, certain explanatory note on the lines of the frequently asked questions that the CBDT had issued in August 2005 for fringe benefit tax. “It is still not clear whether ESOP schemes have to be Central Government compliant or not,” he added.

Mr Amitabh Singh, Tax Partner, Ernst & Young, said that in the case of shares of companies that are not listed in India, but whose employees here get stock options, the category I merchant banker would decide the FMV. “Why should the fair market valuation for ESOPs given by such companies be made subjective?” he asked.

More Stories on : Income Tax | ESOPs | Budget

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page