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 ..... this new clause shall apply 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 1 st 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nker registered with the Security and Exchange Board of India, 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 equi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Finance Bill, 2007, after its enactment and also after the notification of Rule 40C. The questions and answers in the following section seek to clarify these issues: 1. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the grant period bears to the length of the grant period. (The value of fringe benefit means the fair market value of the specified security or sweat equity shares, on the date on which the option vests with the employee, as reduced by 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 han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployee to the employer for allotment or transfer of shares? Answer: No. FBT would not be payable in such cases. 11. What will be the valuation methodology for foreign companies if the shares are not listed in a recognized stock exchange in India but are listed on any globally recognised 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the non-employees will be determined in accordance with the existing law. 18. Which method, first-in-first-out (FIFO) or last-in-first-out (LIFO) shall be followed in case there are multiple date of vesting for different number of shares. For example if the dates of vesting are: 31 Mar 06 - 300 options - FMV Rs. 8 per share ( one share per option) 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 employ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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