The notification said the value of stock options of listed companies would be the listing value - the average of opening and closing price - on the day the options were vested with the employee.
For unlisted shares, the value of the options will be the fair market value (FMV) on the date of vesting, minus the employee's contribution. The FMV would be determined by a top-tier merchant banker on the vesting date or up to 180 days before.
The Finance Act, 2007, had amended the provisions of the Income-Tax Act to make employers liable to pay FBT on the value of ESOPs as and when they were allotted or transferred. However, the specific rules had not been finalised to date. The tax is levied at 30 per cent of the value of the fringe benefit.
Rajiv Anand, partner, PricewaterhouseCoopers, said, "Shares which are not listed in India but are listed overseas will be covered by the guidelines that apply to unlisted options. Guidelines pertaining to valuation of listed shares will only apply to securities listed on Indian stock exchanges."
"No guidelines have been prescribed for valuing unlisted securities. To that extent, merchant bankers will have some flexibility in deciding the methods for valuing such securities," Anand added.
As a consequence of the government imposing FBT on ESOPs, many multinational companies had decided not to pass on the liability to their employees, while many others decided to bear it by including it in the total compensation paid to the employee.
Many others decided to do away with issuing sweat equity due to the compliance issues involved, said a tax consultant.
The CBDT also specified that in cases where, on the vesting date, the share was listed on more than one stock exchange, the FMV would be the average of opening and closing price on the exchange that recorded the highest volume of trading in the share.
Some experts said the guidelines seemed to have addressed some issues while throwing up others. They said an issue of crucial concern related to unlisted companies, for whom the valuation would be done by a top merchant banker.
However, guidelines on how this is to be done have not been issued. KR Sekar, partner, Deloitte Haskins & Sells, said this would pose a practical problem.
