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Fringe benefit tax on ESOPs disappoints IT cos
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`It may end up burdening the employee more'
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"This will add to the challenges being faced by employers in knowledge-intensive industries in attracting and retaining world-class talent."
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Mumbai
Feb. 28
The imposition of fringe benefits tax has met with widespread disappointment, not only from the information technology sector but also from some `old economy' corporates who have recently decided to introduce ESOPs.
"The imposition of fringe benefit tax on ESOPs is most surprising. This will make current ESOPs expensive and would also make it difficult for IT industry that uses ESOP as a major tool to attract talent," Mr Deepak Ghaisas, i-flex Solutions Ltd, said.
"This will add to the challenges being faced by employers in knowledge-intensive industries in attracting and retaining world-class talent," said Mr Ashank Desai, Non-Executive Chairman, Mastek Ltd. "The new ESOP norms would be a dampener for smaller companies, as ESOPs have already become cumbersome owing to the new accounting norms," Mr Atul Nishar, Chairman, Hexaware, said. "This is a retrograde step," said Mr Akil Hirani, Managing Partner, Majmudar & Co, International lawyers. "Depending on how FBT is structured, it could even end up burdening the employee additionally. The employee might anyway be paying capital gains tax when he exercises his options. The Government is going back on what was originally meant in the Income Tax act, that ESOPs would be a perquisite for the employee. It is basically a tool to benefit and retain employees."
"FBT on ESOP is something which may impact us — but till we get to understand the exact tax rate for this (not yet announced) we may not know the impact. However, it is payable only in the year the employees exercise the options and not when they are granted the options. However, the method of computation of fair market value is not specified," Mr Amar Chintopanth, CFO, 3i Infotech, said.
It is not clear when it becomes applicable, said Mr D.D. Rathi, Chief Financial Officer Grasim Industries, calling it a retrograde step. (Grasim belongs to the AV Birla group of companies four of which recently approved in principle issue of ESOPs to their employees.) Mr Keki Mistry, Managing Director Housing & Development Finance Corporation, said it would be a negative move, and that the "fine print" would have to be read.
There was a rather differing opinion from research firm Gartner: "The two minor irritants for the IT industry, the MAT and ESOPs coming under the FBT, are also not major industry wreckers (as the stock markets seem to have interpreted them!)." They are a minor turbulence for an industry "that is growing rapidly, is reaching some level of maturity and is not going to be affected in the medium to long term by blips like these."
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