A SOP story

Narayana Murthy’s chauffeur and personal assistant know the value of an employee stock option. The employees of the Infosys’ founder-CEO were part of the over 2,000 employees who received ESOPs from the company that turned them into overnight millionaires when the company’s shares were quoting at Rs. 7,500 in the early 2000s.

It’s every company’s dream to create that kind of wealth for its best employees. But today, a big gulf has opened between intention and reality. Stock options are less attractive to employees and cumbersome for employers thanks to one joker in the pack — tax. First, the fringe benefit tax (FBT) which was slapped on employee stock options in 2007, created a controversial and formidable hurdle to wealth creation from ESOPs. The FBT was scrapped this year. Now, ESOPs will be taxed as perquisites in the hands of employees.

Why is perquisite tax on ESOPs a problem? Because perquisite tax is calculated on difference between the market price of the stock on the date of exercise and the exercise price. So in a rising market, your tax liability will increase when you exercise your stock option independent of what the price was on the vesting date.

But not everyone sees the move as a bad thing. Nikhil Bhatia, executive director, Pricewaterhouse Coopers, India says, “It’s true that perquisite tax will be more in a rising market, but anywhere you make a gain, your taxes will always go up. If you receive an increment in your salary — does it mean it’s a harsh move on employees because your taxes go up?”

Paying more tax is not the only concern. The practical implementation of the new provisions leaves much to be desired. For instance, it is unclear whether new rules will be prescribed for valuing ESOPs or if the valuation rules will be identical to those under the FBT regime.

NRI employees’ cases are also confusing. FBT was not applicable because they lived outside India. Similarly, in case of Indian employees where FBT was deducted and paid since April 09, companies will have to re-work the perquisite value, calculate the difference with respect to FBT and recover the shortfall or refund excess to the employees. Add to this the complication of working out advance FBT already paid by companies in relation to shares allotted after April 09. Do they refund this amount or adjust it against their corporate tax liability?

According to Bhatia, the government needs to view a company’s ESOP as part of a compensation strategy. “Today, with FBT and the market as it is, an employee is just going to say ‘Boss, I want less ESOP and more cash’. And if the company doesn’t comply, another employer offering a better deal means you’ve just lost an employee.”




-Data sourced from ESOP Direct