ESOPS TO STAY IN MODIFIED VERSION

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PARLIAMENT cleared the 2007-08 budget last week with changes which provide relief to several sections. The fringe benefit tax (FBT) on employee stock options (ESOPs) is here to stay, albeit in a modified version. Also, venture capital investment in assorted infrastructure sectors, excluding power and telecom, will get the benefit of tax pass-through.

The finance minister P Chidambaram modified the dual excise duty structure on cement to bring in 12% ad valorem, in place of the specific duty of Rs 600 per tonne. He slashed the export duty on low-grade iron ore, removed customs duty on refrigerated motor vehicles in a bid to boost food-processing, and brought down the excise/countervailing duty on these vehicles to 8%. Cut and polished gems will not attract customs duty.

Mr. Chidambaram, however, declined to entertain requests for more sops on personal income and corporate taxes, saying every taxpayer has been given considerable relief. He also reiterated the government’s commitment to rein in inflation and said fiscal and monetary measures will be intensified to bring down the rate to 4.5%.

The much-criticised FBT on employees ESOPs will stay, but employers can draw relief from the fact that they will now be able to pass on the tax cost to employees who get these options. Also, FBT will be levied on the value of ESOPs at the time when it vests with the employee and not when the shares are transferred to him. However, the tax will be leviable only when the ESOP is transferred. FBT on ESOPs will stay. “This is a worldwide practice. However, we are introducing some changes and the fair market value will now be determined at the time of vesting of ESOPs”, Mr. Chidambaram said.

Refusing to bow down to pass-through tax exemption to all venture capital funds, Mr. Chidambaram sought to give some relief to infrastructure funds. Along with the eight sectors such as biotech and biofuels, infrastructure VCFs will be able to avail of the pass-through benefit, under which tax is paid not by the fund but those who invest in the fund at the time they receive their payout from it.

The minister also announced fresh excise and customs duty concessions, which are expected to benefit a large number of industries such as cement, gems and jewellery, food processing and retail, packaged foods and steel. Consumers can draw comfort not only on the cement front, but also on ready-to-eat packaged foods items, soya bari and biscuits.

Mr. Chidambaram exempted all ready-to-eat packaged items and biscuits whose sale price does not exceed Rs 100 per kg from excise duty. Excise duty on zippers has also been halved to 8%, which will bring some relief to the garment and leather industry.

The finance minister has also exempted from Customs duty import of aircraft by flying clubs and institutes for training purposes and by nonscheduled point-to-point and non-scheduled charter operators under certain conditions.

He also made concession for employees who stay in a rent free accommodation by reducing the rate for calculation of the total value for levy of tax. The rate shall be reduced from 20 % to 15 % if the population is above 25 lakhs; to 10 % if the population is between 10 lakhs and 25 lakhs; and to 7.5 % if the population is below 10 lakhs.

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