The finance ministry?s recent clarification on fringe benefit tax (FBT) on employee stock options (ESOPs) goes on to reiterate that Indian business is going global.
A large part of the circular, which includes answers to 25 frequently asked questions (FAQs), deal with issues relating to foreign companies and multinational corporations (MNCs) operating in India.
Tax experts too agree that the circular has cleared a large number of questions, which foreign companies had on the tax on Esops.
According to Amitabh Singh, partner, Ernst and Young, ?Most of the clarifications are geared towards foreign companies which would be impacted or employees travelling between two countries and in both situations the clarifications are on a positive note and end a lot of ambiguity.?
However, while it has provided some relief to such companies by clearing their doubts, it has made it difficult for them to operate in the country and may in fact also have an impact on the profitability.
The government has clarified that it will be the Indian arm of a foreign firm providing stock options to the employees of its Indian subsidiary company, which will have to pay FBT. Amarjit Singh partner BSR & Co pointed out that if the Indian subsidiary of a foreign company pays FBT, it would have a cascading effect on transfer pricing. The Indian arm can claim the amount paid as FBT as an operating expense and can recover it from the parent company. While this would only have a marginal effect, it would increase the cost of doing business in India, Singh pointed out.
Analysts also pointed out that while FBT on Esops is here to stay, it would certainly put a damper on their measures for recruiting and retaining employees. Stock options are used extensively by foreign companies as a tool to retain employees and levying FBT on them means that companies will have to rethink this policy, tax experts concurred.