Five key issues in FBT guidelines on ESOPs
There are at least five niggling problems with the new norms issued for ESOP (employee stock option) valuation, says Mr Vikas Vasal, Executive Director, KPMG. "First, in the case of unlisted companies, no particular method has been prescribed for the purposes of valuation of ESOPs," he begins, in an e-mail interaction with Business Line.
"Merchant bankers use different methods for valuation. Therefore, in the absence of any prescribed method, valuation could yield different results depending on the method used." This may lead to possible debate and litigation in future, he cautions.
As you may be aware, the Finance Act, 2007 amended the provisions of the Income-tax Act, 1961 to provide that employers will be liable to pay FBT (fringe benefit tax) on the value of ESOPs granted to employees as and when the ESOPs were allotted or transferred to the employees.
The value of ESOPs for the purposes of levy of FBT shall be the FMV (fair market value) of the ESOPs on the date of vesting of the options as reduced by the amount actually paid, or recovered from, the employee. On October 23, the Central Board of Direct Taxes (CBDT) notified the insertion of Rule 40C in the Income-tax Rules, 1962, specifying the computation of FMV.
The second issue, according to Mr Vasal, in the case of unlisted companies, is that to avoid valuation each time on the date of vesting flexibility has been provided to take an earlier valuation date, not exceeding 180 days from the date of vesting. "The FMV may vary over a period of six months, in case an investment is proposed to be made by a foreign investor."
Third, he apprehends that the new regulations would increase the compliance costs especially for newly set up or relatively smaller private companies which would have to hire the services of Category I merchant bankers.
With different views expressed on the applicability of the FBT on ESOPs issued by a foreign company to the employees of its Indian subsidiary company, the fourth issue Mr Vasal highlights is the need for clarification whether FBT is at all payable on ESOP of foreign companies that do not have any employee based in India.
And lastly, the guidelines specify that FMV is to be computed with reference to the price quoted in a recognised stock exchange (that is, as recognised by the Central overnment under the Securities Contracts (Regulation) Act, 1956). Mr Vasal wonders whether in the case of foreign listed companies the valuation methodology would be the same as an Indian listed company, or whether these have to be valued on the lines of unlisted shares.
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