Fringe benefits and open issues

Written by Parizad Sirwalla | Updated: Feb 12 2008, 05:02am hrs
Effective April 1, 2007, financial benefits granted through the allotment or transfer of securities under an employee stock option plan (Esop) were brought under the fringe benefit tax (FBT) net in India. The Central Board of Direct Taxes, vide circular no 9/2007 dated December 20, 2007, has issued several clarifications on the taxability of Esops. In case of a foreign company allotting shares to employees of its Indian subsidiary, for example, the FBT liability is borne by the Indian employer. A truly welcome clarification in the circular relates to globally mobile employees. In the case of those who are based in India only for a part of the grant period (the time span between the grant and the vesting dates), the proportionate amount in accordance with the length of stay would attract FBT.

Shall we heave a sigh of relief Not quite. There are still some pending issues which need to be addressed. What about the reverse case Would FBT be triggered on the allotment of shares by an Indian parent company to employees of an overseas branch/subsidiary that has no employees based in India Similarly, there is no clarity on whether FBT would apply in case of an allotment of shares by an Indian company to its own employees deputed to work at an overseas branch/subsidiary. If yes, which entity would be liable to discharge the FBT obligation Will the stay of the employees outside India during the period between grant and vesting be excluded for the purpose of computing the fringe benefit

However much we try to draw inferences from the clarifications issued in the circular on the tax treatment for foreign company Esop plans, we are left with loose ends.

There is also no specific clarification on the interpretation of the term employees based in India. Is it only the employees length of stay during the grant period (that is, from the date of grant to the date of vesting of the option), irrespective of the intention of stay, that acts as the qualifying principle Does it need to have a nexus with services rendered by the employee in India

Consider a case of Mr X, an employee of a foreign subsidiary who is a beneficiary under an Esop plan of its Indian parent. Now, Mr X visits India only for vacation (which falls within the period between grant and vesting), and there are no other employees of the foreign subsidiary based in India. Would this trigger FBT

Or, take another hypothetical case of Mr Y, who is a senior employee of a foreign subsidiary and has been granted Esops of the Indian parent company. If Mr Y extensively visits India for business reasons and these visits fall between the period between grant and vesting, will FBT be payable (though no services are really rendered by Y in India)

Similar questions arise in situations where employees of the Indian parent company entitled to Esops are either travelling abroad on specific business visits or on vacation.

On the matter of an employee claiming credit overseas for the FBT paid in India, a view has been expressed in the circular that the FBT paid by the employer in respect of an employee based in India and recovered from him is effectively paid by the employee. However, the employer and the employee being treated as separate taxpayers both in India and in overseas jurisdictions, it would be difficult for the employee to get a credit in the overseas jurisdiction on the FBT ultimately recovered from him.

In case of Esops issued by foreign listed companies, it has been clarified that merchant bankers can use the listed price as a valuation basis and recommend the best value. In this context, foreign companies with shares listed on overseas stock exchanges will face a lot of issues. It might be a better proposition to simply use the listed price on an overseas stock exchange as the basis of valuation for FBT purposes.

The author is director, BSR & Co. These are her personal views