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July 29, 1998


ADR/GDR stock options may prove a downer

Email this story to a friend. The ADR-GDR-linked employee stock option plan may fail to lure the software industry because some of the promised incentives are unlikely to come through.

The Revenue Department has taken a stand that the discount on stocks given to resident Indians under the scheme would be taxed as perks. And perks
Malayali backbone
TAR trouble
ESOP downer
are taxed as part of salary.

This is yet another measure announced in the Budget that appears to be facing rough weather.

The tax exemption under Section 115ac, as officially announced recently by the finance ministry, was to be available to all those opting for stock options.

"ADRs/GDRs acquired on exercise of stock options would be eligible for concessional tax treatment under section 115ac of Income Tax Act, 1961," says the official statement.

Therefore, till date, the expectation has been that the tax exemption would be available to all those opting for the scheme - residents and NRIs. Now the change discriminating against residents would make stock options much less attractive.

This point, apparently, has been communicated to the department in finance ministry handling the stock option scheme. Sources in this department admit that there is a tax problem in the package and it may result in a delay in getting the scheme off the ground.

However, they hope to settle the matter at the earliest and resolve all issues.

The statement announcing the scheme said: "Necessary amendment under Section 115ac of the Income Tax Act, 1961, shall be notified by the Department of Revenue separately.'' It is now learnt that the department has taken the stand that only NRIs can be exempted from paying tax on the stock options and ordinary residents would have to come under the country's tax laws.

The difference between the discounted price at which the stock is sold to the employee and the market price of the stock would be added to the employee's perks and taxed as such.

The Revenue Department is expected to notify the exemption from tax under Section 115ac for NRIs before middle of August, it is learnt.

The stock option scheme, as announced by the finance ministry, would be available only to listed and unlisted software Indian companies that fulfil the performance track record eligibility and other requirements under ADR/GDR guidelines.

The stock options are available to non-resident and resident permanent employees - including Indian and overseas working directors - of the company.

The stock options will not be available to the promoters and their relatives.

This scheme was intended to allow software companies to provide incentives to retain their highly skilled professionals by offering terms comparable to the packages offered by international companies in the field.

A software company, which has already floated ADR-GDR or a company that is proposing to float ADR-GDR would be entitled to issue ADR-GDR-linked stock options to its employees.

The package is being awaited by the software industry and has been considered as a test for similar schemes for different sectors of the industry. But with such problems, the industry is expected to be disappointed.

- Compiled from the Indian media

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