New Delhi: The finance ministry has advised the norms for valuing the employee stock option plans (ESOPs) for computing fringe benefit tax (FBT).

The new regulations will be effective from April 1, 2008, and applicable from assessment year 2008-09.

The notice said that the stock options value of the listed companies would be their listing value (the average of opening and closing price) on the day the options were vested with the employee.

For example, if a company value a share at Rs 100 and the sum can be recouped from an employee or added up to his compensation package, whereas the FMV on the vesting date can be Rs 200. Therefore, the company will pay Rs 30 as fringe benefit tax (FBT) on the variation (Rs 100) between the FMV (Rs 200) and the recovery price (Rs 100).

For the shares that are not listed, the options value will act as the fair market value (FMV) on the vesting date, minus the employee’s contribution. A top-tier merchant banker would decide the fair market value (FMV) on the vesting date or up to 180 days before.

The Finance Act, 2007, had rectified the Income-Tax Act provisions to make employers accountable to provide FBT on ESOPs value as and when they were distributed or shifted.

But, the exact regulations had not been settled to date. The tax is charged at 30% of the fringe benefit value.

Rajiv Anand, partner, PricewaterhouseCoopers, said, “Shares which are not listed in India but are listed overseas will be covered by the guidelines that apply to unlisted options. Guidelines pertaining to valuation of listed shares will only apply to securities listed on Indian stock exchanges.”

“No guidelines have been prescribed for valuing unlisted securities. To that extent, merchant bankers will have some flexibility in deciding the methods for valuing such securities,” Mr. Anand added.

As a result of the government enforcing FBT on ESOPs, lots of MNCs had decided not to forward the liability to their workers. But many others decided to tolerate it by including it in the entire compensation, paid up to the employee.

A tax advisor said that various others decided to remove issuing sweat equity because of the involvement of compliance issues.

The CBDT has also defined that in cases where, on the vesting date, the share got listed on more than one securities market, the fair market value would be on the basis of opening and closing price on the stock exchange, which recorded the highest trading volume in the share.