The Hindu Business Line : FBT on ESOPs clarified

The Central Board of Direct Taxes, vide Circular No 9/2007 dated December 20, 2007, has issued FAQs clarifying various issues relating to Fringe Benefit Tax (FBT) on Employee Stock Options. It’s a welcome circular as it clarifies many issues in respect of the taxability of the benefit arising out of stock options.

The clarifications

First, it has been clarified that where a foreign company allots shares to the employees of its Indian subsidiary company, the FBT liability will have to be paid by the Indian subsidiary company on the ground that the shares are allotted to the Indian subsidiary company by virtue of their employment with the Indian company.

The Indian subsidiary company is liable to pay FBT irrespective of, whether or not, there is a charge back of cost by the foreign holding company.

Second, where the employees are based in India only for a part of the grant period (the time period between the date of grant and the date of vesting), only a proportionate amount in respect of the length of the period of stay in India of the employee will be liable to FBT. This would provide relief to employers who have globally mobile population — both outbound assignees and inbound expatriates.

Challenging issues

There are still certain issues which may pose a challenge for both employers and employees in respect of FBT on ESOPs. Here are a few of them:

Whether employee can claim credit overseas for the FBT paid in India: It has been clarified that an employee is liable to tax in respect of fringe benefits received by him from his employer.

However, due to certain issues it has been decided to levy and recover FBT from the employer. The Indian tax authorities are of the view that FBT paid by the employer in respect of an employee based in India and subsequently recovered from him, is effectively paid by the employee. Therefore, such employee can claim credit in a foreign country for the FBT paid in India.

It is pertinent to note that under the Income-Tax Act, 1961, the FBT has been levied on the employer. Even though an option has been given to the employer to recover the FBT from the employee, it still remains a tax on the employer.

The employer and the employee are treated as separate taxpayers both in India and overseas. Therefore, based on this circular, it would be difficult for the employee to satisfy the overseas tax authorities that FBT ultimately recovered from him by his employer should be allowed as credit against the tax payable by him overseas.

Neither employer nor employee can claim credit for tax paid overseas against FBT: It has been clarified that the employer cannot claim credit in India against its FBT liability for tax paid by employees in the other country. By implication, even the employee cannot claim credit for the tax paid by him in the other country vis-À-vis the FBT liability recovered by his employer in India.

Therefore, if Indian tax authorities are not allowing credit for the tax paid overseas, it is difficult to assume that other countries would allow credit for FBT paid in India, as mentioned above.

Foreign companies still subject to valuation by merchant banker in India: It has been clarified that if the shares are not listed in a recognised stock exchange in India, then such shares will be treated as unlisted and will have to be valued by Category 1 merchant banker registered with SEBI. However, if the shares are listed in any globally recognised stock exchange, the merchant banker shall use the listed price as one basis for valuation and recommend the best value.

In this context, the foreign companies whose shares are listed in overseas stock exchanges will face lot of issues. First, what constitutes “globally recognised stock exchange” is not specified in the circular.

Second, the merchant bankers have been instructed to use the listed price as one basis for valuation and recommend the best value thereafter. This effectively means that foreign companies will have to approach a merchant banker in India and provide necessary information, documents and records for valuation to be done under different methods. The merchant banker will then determine the value based on evaluation under different methods, including the listed price in the overseas stock exchange. This will cause lot of administrative inconvenience to foreign companies in terms of providing data and records for valuation purposes.

It might be a better proposition to simply use the listed price on overseas stock exchange as the basis for valuation for FBT purposes. After all, this valuation needs to be done for arriving at FBT liability in India, rather then actual valuation of the foreign company.

(The author is Executive Director, KPMG.)

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