ESOPs to be a fable soon?

There was a lot of hue and cry about the Budget extending the infamous Fringe Benefit Tax to ESOPs. The exact rules of how they will be taxed isn't clear. But as CNBC-TV18 reports, many companies may dump ESOPs altogether.

The Finance Minister's decision to tax ESOPs as a fringe benefit has raised the hackles of many corporates. Most feel ESOPs may become unviable if they are taxed at the FBT rate of 30%.

"We may have to reconsider giving ESOPs," says Deepak Ghaisas, CEO, i-Flex Solutions.

What worries corporates is that FBT may be levied on the difference between fair market value as on the date of exercise and the ESOP issue price, which could be a fairly large sum. This method of valuation, experts say, does not have precedence elsewhere.

"Globally, no country taxes it as FBT; it is absurd," says Pranav Sayta, Partner, E&Y.

Even so, the Finance Minister says the rules for calculation of FBT will be announced later. "It is a fringe benefit and it will be taxed," said Finance Minister, P Chidambaram.

For lakhs of employees, for whom ESOPs have been a wealth-creation mechanism, it will be an anxious wait as Chidambaram decides how they will be taxed.