The government on Wednesday proposed to bring employee stock option plans under the controversial Fringe Benefit Tax, a move that could be a dampener for stock markets as it will discourage companies from rewarding their employees by giving shares.
"A number of companies provide fringe benefits to employees through ESOP. I propose to bring ESOPs under FBT," Finance Minister P Chidambaram said in his budget speech.
The value of the fringe benefit would be determined in accordance with a prescribed method, on the date of exercise of the option, he said.
Chidambaram, however, gave some relief to pharma firms by excluding free samples of medicines and equipment given to doctors from the FBT net.
This has been a long-pending demand as the industry felt that free samples were essential for business promotion and should not be taxed.
On ESOPs, the budget proposes to include any specified security or sweat equity shares allotted by a company to its existing or former employees within the ambit of fringe benefits for the purposes of tax.
"These amendments will take affect from April 1, 2008 and will accordingly apply in relation to the assessment year 2008-09," as per the memorandum explaining the Finance Bill.
Dividend distribution tax for companies has been raised from 12.5 per cent to 15 per cent. In the case of dividends distributed by money market mutual funds and liquid mutual funds, tax on dividends paid has been raised to 25 per cent for all investors.
Minimum Alternate Tax (MAT) has been extended to income in respect of which deduction is claimed by companies under Section 10A & 10B of the Income Tax Act. Deduction under section 36(1) (viii) to be restricted to 20% of profits each year.