MONEY MAKES THE WORLD GO 'ROUND, PART III:
UPDATE ON INDIA FBT
Six months ago, Xtra focused on the challenges of administering equity awards in India under
the Fringe Benefits Tax ("FBT") regime. Just as everyone started to feel somewhat comfortable
with the "new" rules, the Central Board of Direct Taxes ("CBDT) released changes, effective
April 1, 2009. Full guidance has still not been provided, but some clarifications were offered in
late December 2009.
Under FBT, tax was payable by the employer on the taxable event: stock option exercise, ESPP
purchase, and RSU vesting, but was calculated on the spread at vest. In addition to the difficulty
of calculating the spread at vest for stock options with frequent vesting, companies that were
not listed on an Indian stock exchange could not rely on their FMV on the non-Indian exchange,
such as NASDAQ or NYSE. Instead, these companies had to obtain a valuation from a Category I
Indian merchant banker registered with the Securities & Exchange Board of India ("SEBI").
Unfortunately, the merchant banker valuation requirement has not changed under the new
rules, "Income Tax (13th Amendment) Rules 2009". For companies not listed on an Indian stock
exchange, a merchant banker valuation must still be utilized to determine the taxable gain.
What has changed is that the employer is no longer liable for FBT on the spread at vest. Instead,
the employee will now be subject to income tax on the spread at the time of the taxable event
and the employer must withhold and remit the tax to the tax authorities. Withholding should
occur at the employee's marginal tax rate, with a maximum rate of 30.9%. A summary of the
changes between the FBT regime and the 2009 Rules is provided in the table below.
Summary of Changes
FBT
Applicability
Liability
Taxable Event
Taxable Amount
2009 Rules
Stock-settled awards
Stock-settled and cashsettled awards
Employer
Employee (employer has
withholding obligation)
Stock option exercise,
Restricted Stock Vest, ESPP
Purchase
Stock option exercise,
Restricted Stock Vest, ESPP
Purchase
Spread at vest
Spread at taxable event
FMV Methodology for
Valuation to be provided by Valuation to be provided by
companies not listed on Indian
registered Merchant Banker registered Merchant Banker
exchanges
www.sos-team.com
Page 1
1/10
Tax Rate
Employee's marginal tax rate
(maximum = 30.9%)
33.99%
Companies offering equity awards in India should now do the following:
1. Review any option exercises, RSU vests, and ESPP purchases that may have occurred
since April 1, 2009 and determine the spread for each taxable event using the merchant
banker valuation for the applicable date. As under FBT, the merchant banker valuation
may be utilized for 180 days up to the date of the transaction.
2. Determine if your company made quarterly FBT payments in 2009 and, if so, whether
the amounts were sufficient to cover income tax that might now be payable.
3. Determine whether income tax due can be collected from employees; for terminated
employees, the company may have to pay the tax on behalf of the employee without
the ability to collect the funds.
4. Determine tax withholding methodology and ability to utilize employee's marginal tax
rate.
5. Consult tax advisor to determine methodology for allocation of income for mobile
employees.
6. Review and revise grant agreements, plan documents, as well as employee
communications as needed. Employee communications should address the potential
differences between the actual income received through a cashless exercise and the
income calculated for tax purposes using the merchant banker valuation. The company
will still need to communicate the merchant banker valuation to the employee as the
employee is still responsible for reporting capital gains and losses.
While we are not quite back to the pre-FBT days of qualified stock option plans without an
employer withholding requirement, the new rules should be easier for non-Indian listed
companies to comply with.
Questions on this article or the India FBT in general? Questions with respect to your worldwide
stock plans? Curious about our international service offerings? Email us. We love to talk India
FBT.
About Stock & Option Solutions
Stock & Option Solutions is a leading provider of top-tier stock plan management and
consulting services for companies offering equity compensation and benefit programs to its
employees. Since 1999, hundreds of organizations, from private start-ups to Fortune 500
companies, have relied on Stock & Option Solutions’ expertise for strategic planning,
methodologies and skilled resources to build and support the most effective stock plan
programs possible.
www.sos-team.com
Page 2
1/10