FBT on ESOP: CBDT clarifications

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: The Finance Act, 2007 changed the taxation of securities issued by an employer to its employees from April 1, 2007 (assessment year 2008-2009), by levying fringe benefit tax (FBT) on the employer in respect of securities, defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956, including Employees’ Stock Options (ESOP), and sweat equity shares, which may be allotted or transferred directly or indirectly to the employees (former or current) free of cost or at concessional rate for consideration other than cash for providing know-how, intellectual property rights or value additions.

The value of the fringe benefit (FB) shall be the fair market value (FMV) of the security or sweat equity shares on the date on which the option vests with the employee, as reduced by the amount actually paid by, or recovered from, the employee in respect of the security or shares. FMV is to be determined as per rule 40C of the Income-tax Rules, 1962 (Rules) notified on October 23, 2007. But, rule 40C of the Rules defines the valuation norms only for listed or unlisted shares and not other securities.

The rate of FBT on the value of such FB is 30% plus surcharge and education thereon.

Recent CBDT clarifications

CBDT issued Circular No 9/2007 dated December 20, 2007 clarifying certain matters relating to FBT on securities and sweat equity shares as under:

* Where shares are allotted or transferred by a foreign company to the employees of its Indian subsidiary, the Indian subsidiary (not the foreign company) would be liable to pay FBT. This would entail a cash and tax burden on the Indian subsidiary.