Firms seek clarity on fringe benefits tax

Firms seek clarity on fringe benefits tax
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First Published: Mon, Mar 12 2007. 12 17 AM IST
Updated: Mon, Mar 12 2007. 12 17 AM IST
The government needs to clarify grey areas in the recently introduced fringe benefits tax imposed on employers for share options granted to employees, tax experts say.
The law proposes to tax employers when their employees exercise “any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer”. The tax would be applicable to the difference between the value of the share when exercised and the amount paid for the shares when first issued.
The law does not specify the procedure for Indian subsidiaries of multinational companies, where shares allotted are those of the multinationals. “I hope the government looks into this and clarifies. What happens when the shares issues are of a foreign traded multinational to employees of its Indian subsidiary?” said Bhavna Doshi of the consulting firm KPMG.
Members of the Institute of Chartered Accountants of India made a case for having stock options taxed at the employee’s hand, rather than the employers, and sought a government circular on the issue.
A department official, refusing to be named, said the use of the words “directly or indirectly” would cover the Indian subsidiaries of multinational companies but the department will examine the issue.
“It is impossible for the government to enforce it if it says the parent company has to pay,” said a spokesperson for a US-based multinational, who didn’t want to named, adding that in countries like the US, rules say all employee share-option plans must be shown in its accounts. As such, the government is likely to clarify the matter by putting the onus of paying tax on the local unit of the employee’s firm, he said.
With the onus of paying tax resting on employers, experts said, “in most countries, share options are taxed at the hands of the employees. If an employee with a multinational company decides to relocate to the US, he would be taxed for gains made when he exercises his options, while in India, the employer gets taxed under the fringe benefits tax,” said Sudhir Kapadia, a partner with KPMG. “Since on the one hand, the employee is taxed and on the other, the employer, they can’t avail of the double tax credits.”
The tax could also impact start-up firms with a large share-option package to attract talent from other established firms, said Kapadia. “In many cases, the value of the companies’ share may be very high but it may have very little cash flow, because share value is notional to potential for future revenue. So when the companies are hit with the tax, they would find it very difficult to pay.”
rahul.c@livemint.com
Sreejiraj Eluvangal also contributed to this story.
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First Published: Mon, Mar 12 2007. 12 17 AM IST