The government on Thursday extended the last date for companies to pay advance fringe benefit tax on sweat equity because the method for calculating its fair market value is yet to be finalised.
The earlier deadline for the first installment of advance fringe benefit tax on employees’ stock options was June 15. This has now been extended to September 15, the last date of for the second installment of advanced tax payment.
The Central Board of Direct Taxes (CBDT) is in the process of notifying the method for determination of the fair market value of sweat equity.
Finance Minister P Chidambaram proposed the introduction of the fringe benefit tax on sweat equity in the Budget for 2007-08, setting off howls of protest from corporate India, particularly the information technology industry that uses stock options to attract talent.
“In the absence of a method for determination of the fair market value, it will not be possible for an employer to determine the value of the first installment of advance tax related to fringe benefit tax in respect of allotment or transfer of specified security or sweat equity shares to its employees,” a finance ministry statement said.
An employer is liable to pay tax on sweat equity shares allotted at a concession to employees. The value of the fringe benefit is determined as the fair market value of the stake on the date on which the option vests with the employee. The difference between the fair market value and the exercise price of the option is likely to be used for calculation of the tax. The computation could be a variation of Black and Scholes model that involves information on the underlying asset, price volatility, time to expiry and interest rates.
Typically, stock options go through a four-stage process: grant of options, vesting, exercise (the stage at which the employees get the option of buying the shares at a discounted price) and sale.