INDIA BUSINESS WORLD - DECEMBER 16^th - DECEMBER 31^st - 2007

UNLISTED MNCS MUST TALLY PARENT SCRIPS FOR ESOP VALUE - FBT CIRCULAR ENABLES EXPATS TO CLAIM CREDIT AGAINST FBT IN INDIA

Unlisted multinational companies in India, which offer stock options to local employees, must get the shares of their parents valued by a Sebi-registered Category 1 merchant banker to arrive at their fair market value. This has been clarified by a circular on fringe benefit tax (FBT) issued by the finance ministry.

The bulk of the new clarifications relate to foreign companies and their employees. The FBT on employee stock options (Esops) is levied on the difference between the fair market value of the share on the day of vesting and the amount paid by the employee for acquiring the share when he exercises the option.

Listed companies in India have been allowed to determine the fair market value using the average opening and closing price on the date of vesting of the option. The valuation by merchant bankers was required to be made only in the case of unlisted companies, including such MNCs. Merchant banks may use the market price, in the case of MNCs listed abroad but not listed in India, as a basis for determining the fair market price for calculating FBT.

The valuation made by a merchant banker will be binding on the assessing officer unless it is 'perverse.' In what is likely to give big relief to expat employees, the Central Board of Direct Taxes (CBDT) has allowed them to claim credit against the FBT they pay in India. Incidentally, employers have been allowed to pass on the cost of tax to their employees. Globally, stock options are taxed at the hands of employees.