Budget '07-'08: PC's post-Budget interview

TAX-MAN: Finance Minister P Chidambaram says employee stock options are a fringe benefit and must be taxed.

        

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Just a day after the Budget, FM P Chidambaram spoke to TV18 network's Editor Raghav Bahl, where he clarified that discussions on the Rangarajan Panel will start.

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Chidambaram: No. Kelkar has recommended 20, let me remind you. Therefore, there is no agreement yet on a convergence rate and without an agreement, we cannot move either service tax or excise duty. If I reach a convergence rate agreement this year, then next year we will make the movement.

Bahl: Surely you could not be thinking of 20 per cent?

Chidambaram: Kelkar has recommended 20.

Bahl: That is a recommendation of an academic committee?

Chidambaram: I have to consult everyone.

Bahl: Let me talk about one issue which may not be very large on your agenda, but where clearly the Finance Ministry seems to have got it completely wrong. And that is the Fringe Benefit Tax assessment of Employee Stock Ownership Plans, or ESOPs. ESOPs are a capital asset. They are a wealth-creating asset and you are taxing them like income. Which canon of economic thinking can ever justify that?

Chidambaram: Let me ask you a very simple question. Is ESOP a fringe benefit or not?

Bahl: Yes, okay conceded. It is a transfer of remuneration from the company via a capital asset.

Chidambaram: If it is a fringe benefit, it has to be taxed. I have not yet told you how we are going to calculate it, how we are going to tax it. All that will come in the rules. All that we have said is ESOP is a fringe benefit and I am extending FBT to it. You will have to wait to see how we determine the value of ESOP, how we tax it. All that has to be announced once we come up with the detail.

Bahl: Therefore, the media, which seems to be suggesting that 34 per cent is going to be the rate of taxation on the gains realised on the date of exercising of ESOPs has got it wrong? Is it categorical?

Chidambaram: I do not know whether it is wrong or right, all I know is that at the moment it is completely premature. Because I have not seen the detail calculations yet. So how could the media claim to know what it is?

Bahl: Therefore, it is not a given that they will be taxed at the income tax rate?

Chidambaram: It is a given that it will be taxed at the FBT rate; what the base will be, how the base will be calculated, how the tax will apply all that has to be worked out?

Bahl: Fine. I think that would come as a major relief because otherwise what seems to have been suggested and wasn’t denied strenuously yesterday by anybody is that you are actually going to tax capital assets at the rate of income tax.

Chidambaram: Who is in a position to deny it or affirm it except me? You didn’t put the question to me yesterday.

Bahl: But I am talking to you now?

Chidambaram: And I am telling you today. We have announced the policy that FBT will include ESOPs. Now what the ESOP should be, how it will be valued, how it will be taxed all that has to be worked out.

Bahl: That's fair enough. Because otherwise, this government was increasingly getting seen to be too anti-urban.

Chidambaram: No, not at all. Play what the three presidents of the three chambers said this morning back on your television channel.

Bahl: I think what you said yesterday in one of your appearances was that ESOPs are largely given to senior managers - that is not correct. ESOPs have led to an entrepreneurial upsurge in this country. And if you start taxing them at the maximum incomes rates ...

Chidambaram: Did you know that many developed countries are moving away from ESOPs?