ESOPs to be a fable soon?

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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.