Stock appreciation rights soften Esop blow

New Delhi, May 29 | Updated: May 30 2007, 05:30am hrs
Companies are exploring stock appreciation rights (SAR) to get over the blow dealt by finance minister P Chidambaram on employee stock option (Esop) plans in this years Budget.

Popular abroad, the SAR option gives companies leeway to structure their Esop in a manner so that the tax liability is transferred to the employee from the employer. It benefits the employees, too, because they are taxed when they derive the benefit of stock appreciation, instead of paying tax at the vesting stage.

Companies, especially in the IT and BPO segments, have been particularly peeved at having to bear the tax liability for Esops and feel it should be borne by employees.

In SAR, a company gives its employees a formal option to profit from any appreciation in the value of its shares. It is, therefore, a stock option. But, it is different from Esops that do not require employees to pay for the SAR when it is offered. Instead, they pay when they exercise their right to buy it. The plan could benefit many companies with large unexercised Esops that Budget 2007-08 brought in the ambit of the fringe benefit tax. These companies can use the SAR to pass on their tax liability to employees by swapping Esops with the SAR.

Amitabh Singh, tax partner, Ernst & Young said, Companies are looking at options such as SAR for their employees in place of Esops. However, their tax liability is still not clear. He has support in the finance ministry. A North Block official said, As long as there is no revenue leakage and tax is being paid, we have no problems.