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Do away with FBT on ESOPs: CII

03
Apr '07
Reacting to the imposition of FBT on ESOPs, the confederation of Indian industry (CII) in a press release issued here has said that the incidence of FBT on ESOPs would lead to complete jeopardizing of the viability of such schemes thereby derailing the momentum desired for ramping up the employee morale and commitment.

It argues that the FBT burden will be ultimately passed on by the employer to the employee. Alternatively, the increased FBT burden on employers may compel them to consider discontinuance of ESOPs, which will lead to high attrition rates in the absence of this effective incentive for retaining talented personnel, warns the CII.

In case it is not possible to scrap the proposal to levy FBT on ESOPs, CII has suggested five-point formula to minimize its impact.

First, it said that the legislature should introduce the levy with prospective effect on grants issued on or after April 1, 2007, in line with the basic tenets of taxation of fairness, natural justice and stability of tax laws. As the levy of FBT at the point of exercise will result in unenvisaged tax liability in the hands of companies in respect of options, which have already been granted on or before March 31, 2007, the business plans of companies will be substantially vitiated due to the higher FBT incidence, argues the CII.

Second, CII has suggested that Black Scholes method should be adopted for the purposes of valuation of ESOPs in case of listed companies and book value method for determining the fair value of shares in the case of unlisted companies. The model determines the ESOP price based on parameters like exercise price, present share price, volatility, dividend yield, etc.

Stressing its points further CII press release has mentioned that this method has been recommended by the financial accounting standards board of the United States, guidance note issued by the Institute of Chartered Accountants of India and the international accounting standards.


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