Govt specifies tax norms on ESOPs
Fringe Benefit Tax (FBT) will be charged on the difference between the price paid by the employee and the fair market value (FMV) of the equity of a listed company, the government said on Tuesday, while setting guidelines for calculation of FBT on employee stock option scheme.
Under Employee Stock Options (ESOPs), companies offer the share option to eligible employees at a discounted price vis-à-vis FMV. The notification said the FMV would be the average of the opening price and closing price of the share on the date of “vesting”. Typically, ESOPs go through a four-stage process: grant of options, vesting of options, exercise of options (the stage at which employees are eligible to buy shares) and sale of these options in the market.
Finance Minister P. Chidambaram has proposed to introduce FBT in ESOPs as part of the Budget 2007-08 even though it triggered protests from the corporate world, particularly by the information technology industry that uses ESOPs to attract talent. Usually, the companies vest the options to eligible employees and offer the exercise option for a later date.