Tax on ESOP

Our beloved Finance Minister, lovingly known as Chidu, has introduced a weird proposal (remember Budget announcements are just proposals and the bill has to be passed by both the houses) to tax on ESOPs.

The proposal says that all the ESOPs which have been granted to Employees in the Past and which would be granted in future would be taxed @ 33 % as Fringe Benefit Tax (FBT). The rate of tax has yet not been decided but FBT as of now has been paid by Corporate @ 30 % plus education cess of 10 % on FBT. Chidambaram has been talking in the media and has been quoted in an interview that the tax rate and the calculation method has yet to be prescribed.

Well, now since I am from IT Sector, I know the impact would be huge in terms of the tax to be paid by the employer. ESOP is a very good incentive to retain employees. The attrition rate has been very high lately and even today ESOPs work to the extent of retaining atleast 50% of the employees considering the growth of over 30% in NP and consequent increase in Stock Price.

Now, the question is not relating to future ESOPs, which obviously companies would try to avoid because of the tax impact. The question arises in case of the ESOPs already granted to the employees.

The following was the answer of Mr. Chidambaram in an interview to TOI :

Would it apply to ESOPs given before the Budget and not encashed, Chidambaram was asked.

"Of course, it will. The gain is taxed only when the ESOP is exercised. When the ESOP is not exercised, there is no gain at all," he said in an exclusive interview.

If company has to pay FBT as per last year's rate, the impact would be huge. As per ET, in case of some companies, HDFC Bank has 13 million shares pending to be exercised by the employees. In case of ICICI Bank, it is 23 millions and in case of Infosys, its 11 million.

To give an example, say Satyam has provided the ESOP to employees for Rs. 250. The current price is 412. The differential amount would be charged as FBT for Corporate @ 33 % which would come to around Rs. 48 per share. Now, there are companies who are already telling that they are going to pass on the financial burden of tax to the employees.

Mr. FM should clearly understand that he is trying to burden the IT and Financial Sector Employees where the demand for comsumption is coming in the economy. How would the economy grow without their consumption. Here is the biggest blunder which he is trying to do. How can growth be sustained without the strength of the new economy where employees are provided additional incentives to stay back in India or with the Indian Companies with ESOPs.

Hope the tax rate would be marginally higher than the rate of 10 % and 0 % only which the employee already pays to the Government when the shares are sold in short term and long term respectively after the same is exercised.

Also hope sense previals.