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TMI BlogExplanatory circular on Fringe Benefit Tax arising on allotment or transfer of specified securities or sweat equity sharesX X X X Extracts X X X X X X X X Extracts X X X X ..... y even if the allotment or transfer is directly or indirectly; (iv) the provisions of this new clause shall apply even if the allotment or transfer is free of cost or at concessional rate; (v) the provisions of this new clause shall apply even if the allotment or transfer is to current or former employee or employees; (vi) the provisions of this new clause shall apply in cases where the allotment or transfer is on or after 1st day of April, 2007. The expressions "specified security" and "sweat equity shares" have also been defined. The value of fringe benefit is subjected to FBT at the prevailing rate, which is currently 30% plus surcharge plus education cess. 2. Method of computation of the value of the fringe benefit Under the existing provisions contained in section 115WC, the method of computation of the value of fringe benefits referred to in section 115WB has been provided. A new clause (ba) in sub-section (1) of the said section 115WC has been inserted to provide for computation of fringe benefit related to allotment or transfer of specified security or sweat equity shares by employers to employees. It has been provided that the value of fringe benefit in such cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the specified date. (v) The specified date has been defined as to mean,- (i) the date of vesting of the option; or (ii) any date earlier than the date of the vesting of the option, not being a date which is more than 180 days earlier than the date of the vesting. 3. Determination of the cost of acquisition for capital gains purposes Consequent to insertion of clause (ba) in sub-section (1) of section 115WC providing for the valuation of fringe benefits referred to in clause (d) of sub-section (1) of section 115WB, a new sub-section (2AB) has been inserted in section 49. This new sub-section provide that the cost of acquisition of specified security or sweat equity shares shall be the fair market value which has been taken into account while computing the value of fringe benefit under the new clause (ba) of sub-section (1) of section 115WC. 4. Determination of the period of holding A new sub-clause (hb) has also been inserted in clause (i) of Explanation 1 to clause (42A) of section 2. This new sub-clause provide that the period of holding in case of such specified security or sweat equity shares, in the hand of the employee, shall be reckoned from the date of allotment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether a foreign company is liable to pay FBT on shares allotted or transferred to the employees of its Indian subsidiary? Answer: In terms of the provisions of Chapter XII-H of the Act, an employer, being a company, is liable to pay FBT in respect of the fringe benefits provided or deemed to have been provided by it to its employees, directly or indirectly, during the previous year. Since the shares are allotted or transferred to employees of the Indian subsidiary, by virtue of their employment with the subsidiary company, the liability to pay fringe benefit tax on such shares vests upon the Indian subsidiary and not on the foreign company. 2. Whether charge back of costs by the foreign company to the Indian subsidiary is relevant to determine the obligation of the Indian company to pay FBT? Answer: As stated in answer No.1, the Indian subsidiary is liable to fringe benefit tax irrespective of whether or not there is a charge back of cost by the foreign holding company. 3. Will FBT apply in case of employees of the Indian subsidiary for shares awarded by the foreign holding company if the employees of the Indian subsidiary are allotted or transferred shares while outside Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount actually paid by, or recovered from, the employee in respect of such shares.) 6. What will be the cost of acquisition of shares, referred to in question nos 4 and 5, where only a proportionate value of fringe benefit has been subjected to FBT? Answer:- In accordance with section 49(2AB) of the Act, the cost of acquisition of such shares shall be the fair market value on the date on which the option vests with the employee. The calculation of fringe benefit for the purpose of determining FBT does not change this value. Hence, the subsequent calculation of reducing such fair market value by the amount actually paid by or recovered from the employee as well as the calculation of proportionate value in certain cases, referred to in Question No.4 & 5 above, will not change the cost of acquisition. 7. Where the benefit on account of shares allotted or transferred under Employee Stock Option Plans (ESOPs) is taxed in the hands of the employees in different countries, would the employer still be liable to FBT? If yes, can the employer claim credit for payment of tax by the employee in other countries? Answer: Employer will be liable to FBT in India irrespective of whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock exchange? Answer: If the shares are not listed in a recognized stock exchange in India, the shares will be treated as unlisted. Accordingly, such shares will have to be valued by category 1 Merchant Banker registered with Securities and Exchange Board of India. However, if the shares are listed in any globally recognised stock exchange, the merchant banker shall use the listed price as one of the basis for valuation and recommend the best value. 12. Whether an independent valuation carried by any foreign merchant banker/other experts as recognized for the purposes of valuation in the foreign country be treated as sufficient compliance for the purposes of valuation of fringe benefit arising on account of allotment or transfer of shares under ESOPs of an unlisted foreign company or is it mandatory that the merchant banker should be registered with the Securities and Exchange Board of India. Answer: For the purposes of valuation of fringe benefit arising on account of allotment or transfer of shares under ESOPs of an unlisted foreign company, it is mandatory for the valuer to be a category I Merchant Banker registered with the Securities and Exchange Board of India. 13. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31 Mar 07 - 300 options - FMV Rs. 9 per share ( one share per option) and the employee is allotted 500 shares as on 30 September 2007, how will FBT be calculated? Answer: In such cases, the First-in-First-Out (FIFO) method shall be followed. Hence, the FBT shall be calculated with respect to 300 shares at FMV of Rs 8 per share and 200 shares at FMV of Rs 9 per shares. 19. Whether it is binding upon the Assessing Officer to accept the valuation made by the merchant banker? Answer: It is binding upon the Assessing Officer to accept the valuation made by the Merchant Banker unless the valuation by such banker is perverse. 20. How would the recovery of FBT be treated in the hands of the employer? Answer: Since FBT is not an allowable deduction in computation of the income of the employer, any recovery of FBT will not be treated as income in his hands. 21. What should be the mechanism and timing of recovery of FBT? Answer: The law does not provide for any specific mechanism or timing of recovery of FBT. 22. Is it lawful for the employer to recover FBT with respect to ESOPs granted prior to April 1, 2007? Answer: It would be lawful for the employer to recover FBT with respec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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