FBT on ESOP in India - Who has to pay? Employee or employer?

Question

what are the implications of FBT on ESOPS as per the current Indian budget? Who is supposed to payup? employee or the employer? Is it clearly defined?

Answer 1

FBT are always to be paid by employers, and not by employee.

Answer 2

NEW DELHI: The tax burden on benefits from employees' stock option plan (ESOP) may be shifted on employees, treating it as perquisite in their hands. In the Budget, FM Chidambaram has introduced fringe benefit tax (FBT) on ESOP, which leaves the burden of this tax on companies that issue stock options.

However, on Monday Chidambaram clarified that the methodology of calculating tax on ESOP is yet to be finalised. The ministry is open to discuss with the industry whether it should be treated as FBT or as perquisite of employees. The department would welcome the inputs from industry in this regard, he added.

He reiterated that ESOP is a benefit to the employees given by companies. And, therefore, would either be taxed as
FBT or as perquisite. FM said industry can present their views on how it should be taxed. In ESOP, shares are issued by a company to an employee at a discount to the prevailing market price, with a condition that he can exercise the option to get those transferred in his name in future, provided he continues to work in that company. ESOP is used as an incentive instrument.

Under the new tax proposal, the difference in the market value of the shares, given under ESOP, on the date of exercising the option and the price he had paid to acquire these shares, would be treated as gain. In case of FBT, the gain would be treated as fringe benefit extended by the companies to their employees and they will have to pay the tax at the rate of 33.99%. But, if it is treated as perquisite, tax liability will be shifted on employees. However, in case of FBT also, companies are saying that they would pass the tax liability on employees.

Wipro CFO Suresh Senapaty said his company would recommend ESOP to be treated as perquisite. By doing so, he said, many NRI employees will get a same amount of discount (against tax on ESOP paid in India), while paying tax at home. But, if it is treated as FBT, the company would have to pay the tax against benefits to employees. Even NRI employees would not get any discount at home as the tax is paid by the company.

He said most companies including Wipro would pass on the liability under FBT to employees. An Indian employees will pay the tax at the rate of 30.90% if his total income, including the value of perquisite in the form of ESOP in the year of exercise the option is less than Rs 10 lakh and 33.99% if it is more than Rs 10 lakh. But, if it is treated as FBT then the burden on employees will depend on company's policy.