MoF refuses to remove ESOP tax

BANGALORE: The ministry of finance (MoF) has ruled out removing tax at the

time of exercise of employee stock option (ESOP) scheme, anticipating misuse of

the scheme and revenue loss. Despite strong lobbying by IT minister Pramod

Mahajan, MoF maintains that at the exercise of the option, ESOP is taken as

perquisite that must be taxed as a salary.

According to the MoF, the "benefits partakes character of salary and

should therefore be taxed.'' Other countries like Australia, New Zealand, UK

include perks as part of taxable income, the MoF sources said. As per the

current norms, the employee is taxed both at the time of exercise of option, (as

perquisite) when the employee takes on the shares and at the time of sale of the

shares (for capital gains).

The tax at the time of exercise of option is 34.5 per cent, while the

long-term capital gains tax arising on sale of the ESOP is 10 per cent. The

effective rate of tax on the entire process, from the reduced price at which

employees are given shares (taken as perquisite) and the price appreciation (on

which capital gains tax is levied) is between 14 and 15 per cent, which is far

lower than that prevailing in the other countries, the MoF sources said.

According to MoF sources, in UK, there is a tax at the stage of offering of

the ESOP. Moreover, in a scenario where there is no gift tax in India and there

is international mobility of employees, there is every possibility of employees

gifting their stock after exercising their option and moving out of the country,

so as to evade taxes. The MoF sources also said that there is a case for having

a Fringe Benefit Tax Act on the lines of that prevailing in Australia and New

Zealand, to stop tax evasion. This Act is applicable in case of any non-payment

of tax on benefits and perks. The Nasscom, however, feels that the benefits

arising at the time of exercise of option are notional and therefore should not

be subject to tax.