MoF refuses to remove ESOP tax

By : |March 7, 2000 0

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.

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