FBT arising on allotment or transfer of specified securities or sweat equity shares
In terms of the provisions of Chapter XII-H of the Income-tax Act (hereinafter referred to as Act), an employer, being a company, is liable to pay Fringe Benefit Tax (FBT) in respect of the fringe benefits provided or deemed to have been provided by it to its employees, directly or indirectly, during the previous year.
With a view to bring grant of stock options by employers to employees within the purview of FBT, Finance Act, 2007 has inserted a new clause (d) in sub-section (1) of section 115WB. The salient features of this provision are:-
(i) FBT shall apply in all cases where any specified security or sweat equity shares has been allotted or transferred by the employer to his employees;
(ii) FBT shall be payable in the previous year in which such allotment or transfer has taken place;
(iii) The provisions of this new clause shall apply even if the allotment or transfer is directly or indirectly;
(iv) The provisions of this new clause shall apply even if the allotment or transfer is free of cost or at concessional rate;
(v) The provisions of this new clause shall apply even if the allotment or transfer is to current or former employee or employees;
(vi) The provisions of this new clause shall apply in cases where the allotment or transfer is on or after 1st day of April, 2007.
The expressions specified security and sweat equity shares have also been defined. The value of fringe benefit is subjected to FBT at the prevailing rate, which is currently 30% plus surcharge plus education cess.
2. Method of computation of the value of the fringe benefit
Under the existing provisions contained in section 115WC, the method of computation of the value of fringe benefits referred to in section 115WB has been provided. A new clause (ba) in sub-section (1) of the said section 115WC has been inserted to provide for computation of fringe benefit related to allotment or transfer of specified security or sweat equity shares by employers to employees.
It has been provided that the value of fringe benefit in such cases shall be determined in accordance with the formula
A B
Where, A = the Fair Market Value (FMV) of the specified security or sweat equity shares on the date of vesting of the option; and
B = the amount, if any, actually paid by, or recovered from the employee;
The expression fair market value has been defined to mean the value determined in accordance with the method as may be prescribed by the Board.
Option has been defined to mean a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price.
The Central Board of Direct Taxes (CBDT) vide notification S.O. number 1805(E) dated 23rd October, 2007 has inserted Rule 40C in the income-tax Rules; which has prescribed the method for determination of fair market value of specified security or sweat equity share, being a share in the company. Salient features of this rule are:
(i) In a case where, on the date of the vesting of the option, the share in the company is listed on a recognized stock exchange, the fair market value shall be the average of the opening price and closing price of the share on that date on the said stock exchange;
(ii) If on the date of vesting of the option, the share is listed on more than one recognized stock exchanges, the fair market value shall 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 share;
(iii) If on the date of vesting of the option, there is no trading in the share on any recognized stock exchange, the fair market value shall be,-
(a) the closing price of the share on any recognised stock exchange on a date closest to the date of vesting of the option and immediately preceding such date; or
(b) the closing price of the share on a recognised stock exchange, which records the highest volume of trading in such share, if the closing price, as on the date closest to the date of vesting of the option and immediately preceding such date, is recorded on more than one recognized stock exchange.
(iv) In a case where, on the date of vesting of the option, the share in the company is not listed on a recognized stock exchange, the fair market value shall be such value of the share in the company, as determined by a Category 1 Merchant Banker registered with the Security and Exchange Board of India, on the specified date.
(v) The specified date has been defined as to mean,-
(i) The date of vesting of the option; or
(ii) Any date earlier than the date of the vesting of the option, not being a date which is more than 180 days earlier than the date of the vesting.
3. Determination of the cost of acquisition for capital gains purposes
Consequent to insertion of clause (ba) in sub-section (1) of section 115WC providing for the valuation of fringe benefits referred to in clause (d) of sub-section (1) of section 115WB, a new sub-section (2AB) has been inserted in section 49.
This new sub-section provide that the cost of acquisition of specified security or sweat equity shares shall be the fair market value which has been taken into account while computing the value of fringe benefit under the new clause (ba) of sub-section (1) of section 115WC.
4. Determination of the period of holding
A new sub-clause (hb) has also been inserted in clause (i) of Explanation 1 to clause (42A) of section 2. This new sub-clause provide that the period of holding in case of such specified security or sweat equity shares, in the hand of the employee, shall be reckoned from the date of allotment or transfer of such security or shares.
5. Recovery of FBT by the employer from its employee
A new section 115WK has also been inserted enabling the employer to recover the fringe benefit tax from the employee in respect of specified security or sweat equity shares, if such security or shares are transferred or allotted to the employee on or after 1st April, 2007.
It has been prescribed that the employer can vary the agreement or scheme under which such specified security or sweat equity shares has been allotted or transferred. The agreement or scheme can be varied with a purpose to recover from the employee the fringe benefit tax to the extent to which such employer is liable to pay the fringe benefit tax in relation to the allotment or transfer of such specified security or sweat equity shares to such employee.
CAclubindia
Garima
Published in Income Tax