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ESOP rules for FBT notified

NEW DELHI: The Central Government on Tuesday notified the rules for determining the fair market value (FMV) of stocks given by corporates to their employees for the purpose of calculating the fringe benefit tax (FBT) to be paid by employers.

Since the mode of calculating the tax due as FBT on the Employees Stock Option Scheme (ESOP) has been hitherto a grey area, the Government has now made it clear that the levy will have to be paid by employers on the difference between the FMV of shares and the price at which they are given to employees.

For listed companies, as per the notification here, the FMV of the ESOP will be the average of opening and closing prices of shares on the stock exchange as on the date the employee becomes eligible for the option.

However, if the shares are traded on more than one stock exchange, the FMV is to be the average of the opening and closing prices of the scrip on the exchange which reports the highest trading volume.

The notification has also clarified that in the event of the shares not being traded on the specified day when the employee becomes eligible for the option, the price of the share on the day closest to the vesting of option is to be considered for FMV calculation.

As for unlisted companies, the FMV will be determined by merchant bankers on the date of vesting of option which, in effect, is the date on which the employee is given the right to apply for shares under ESOP, the notification said.

Brought under the tax net in the budget for the current fiscal, the FBT on ESOPs was originally proposed to be levied at the time of exercising the stock option and not when the employee becomes eligible for that option.

The FBT incidence on ESOPs, the notification said, would be about 34 per cent of the taxable value for domestic companies and 42 per cent for foreign companies.

The levy is to apply on ESOPs issued after April 1, 2007.

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