EsoPs Service Tax


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EsoPs Service Tax

  1. 1. Professional Learning Workshop on Understanding ESOPs, Service Tax and Roadmap for GST July 17, 2007 P V Srinivasan Vice President – Corporate Taxation
  2. 2. Employees Stock Option Plan
  3. 3. Introduction <ul><li>Employee Stock Option is: </li></ul><ul><ul><li>A right but not an obligation. </li></ul></ul><ul><ul><li>Granted to an employee. </li></ul></ul><ul><ul><li>To apply for the specified security of a company. </li></ul></ul><ul><ul><li>At a predetermined price. </li></ul></ul><ul><li>ESOP Objective </li></ul><ul><ul><li>Attract, encourage and retain talented employees. </li></ul></ul><ul><ul><li>Compensation in terms of ownership and profit share. </li></ul></ul><ul><ul><li>A risk-based compensation – need for lower taxation. </li></ul></ul><ul><ul><li>Nurtures entrepreneurship. </li></ul></ul>
  4. 4. Flow of Events Grant of Options Vesting of Options Exercise of Options Allotment of Shares Sale of shares Valuation of Shares on date of Vesting Fringe Benefit Tax Capital Gains Tax Trigger
  5. 5. Taxation of Stock Options <ul><li>What is the taxable event ? When FBT on Stock Options is chargeable? </li></ul><ul><li>What happens to options exercised on or before 31-03-2007 but where shares are allotted on 1-4-2007 or thereafter? </li></ul><ul><li>What happens to vested options but not exercised before 1-4-2007 ? </li></ul><ul><li>Is ESOP still a perquisite u/s 17(2)(iii) liable to tax in the hands of the employee? </li></ul><ul><li>What is the impact on account of elimination of proviso to Section 17(2)(iii)? </li></ul><ul><ul><li>Central Government guidelines. </li></ul></ul>
  6. 6. FBT on Stock Options-Issues <ul><li>What should be the guiding principles for prescribing the methods for determining “fair market value” of vested options? </li></ul><ul><li>Should there not be a difference between “value of vested options” and “value of underlying shares”? </li></ul><ul><li>What happens when FMV on the date of vesting of options is lower than the exercise price? </li></ul><ul><li>What happens if the FMV on the date of allotment of shares is lower than the FMV on the date of vesting? </li></ul>
  7. 7. Taxation of Stock Options- Unique situations <ul><li>Is ADR / GDR a specified security as defined in the Explanation under Sec.115WB(1)(d)? </li></ul><ul><li>How is the FBT on “Sweat Equity” to be determined? </li></ul><ul><li>What is the status of “Stock Appreciation Rights”? </li></ul><ul><li>How “cashless options” will be taxed? </li></ul><ul><li>Whether “partly paid-up” shares allotted before 1-4-2007 will be subject to FBT when the shares are fully paid-up? </li></ul>
  8. 8. Taxation of Stock Options- Unique situations <ul><li>What is the status of options vested before 1-4-2007 but exercised following business re-organization after 1-4-2007? </li></ul><ul><li>Can there be options that are transferable ? If so, how such options will be taxed? </li></ul><ul><li>Is the status of shares issued under IPO reserved for employees same as shares allotted under ESOPs? </li></ul><ul><li>Is there a mechanism for elimination / avoidance of double or multiple taxation of ESOPS? What is the implication of OECD guidelines on ESOP? </li></ul>
  9. 9. Recovery of FBT <ul><li>Should the FBT to be recovered from employee be reckoned for determining a lower FMV? </li></ul><ul><li>Can the recovery of FBT be considered as part of “cost of acquisition” of shares for the purpose of computing capital gains? </li></ul><ul><li>Can FBT recovered from employees be adjusted against provision for FBT debited to Profit and Loss Account? </li></ul><ul><li>Whether FBT recovered is considered as income (a) when it is paid within the financial year (b) when it is not paid before the end of the financial year? </li></ul>
  10. 10. Stock Options- SEBI & Accounting Perspective <ul><li>Is the accounting charge relevant to FBT? </li></ul><ul><li>Is there an implication of SEBI guidelines on ESOP in the context of FBT? </li></ul><ul><li>Is there any restriction under any law for recovery of FBT as per Section 115KWA? </li></ul><ul><li>Whether ESOP cost is deductible in the company’s computation of taxable Income? </li></ul>
  11. 11. Service Tax
  12. 12. Service Tax – Emerging trends <ul><li>Coding of Services </li></ul><ul><ul><li>A total of 100-odd services categorized from (a) to (zzzzd). </li></ul></ul><ul><li>Emerging trend in consolidation of services: </li></ul><ul><ul><li>Telephone Connection, Pager, Leased Circuit, Communication through telegraph, communication through telex and facsimile communication are merged under one head – “telecommunication services”. </li></ul></ul><ul><li>Works contract services : Scope to include more services where transfer of goods is integral to provision of services. </li></ul><ul><ul><li>Management, Maintenance & Repair, Interior Decorator, Business Auxiliary Services. </li></ul></ul><ul><li>Renting of commercial immovable property : Questions on whether “renting” is a service at all? Constitutional validity challenged in Bombay High Court. </li></ul>
  13. 13. Service Tax – Import not a mirror of Export <ul><li>Export of Service Rules : Welcome change - “Service is provided from India” and “ used outside India”. </li></ul><ul><li>Taxation of Services (Provided from Outside India and Received in India) Rules, 2006: </li></ul><ul><ul><li>Specified services as are provided or to be provided in relation to an immovable property situated in India. </li></ul></ul><ul><ul><li>Specified services as are performed in India. </li></ul></ul><ul><ul><li>Services as are received by a recipient located in India for use in relation to business or commerce . </li></ul></ul><ul><li>Foreign Trade Policy – Annual Supplement 2007-08: Exemption from services received / rendered abroad in connection with all goods & services exported from India. </li></ul>
  14. 14. Service Tax - Administration <ul><li>Tax Payer Services </li></ul><ul><ul><li>E-payment of service tax from designated banks / branch. </li></ul></ul><ul><ul><li>E-filing of return. </li></ul></ul><ul><ul><li>Refund of excess service tax remitted? </li></ul></ul><ul><li>Two circulars from CBEC to supersede all: Dealing with </li></ul><ul><ul><li>Procedural Issues including availment & utilization of CENVAT credit. </li></ul></ul><ul><ul><li>Scope and classification of Taxable Services, valuation, levy etc. </li></ul></ul><ul><li>Exclusion list for service tax : Tax every service except the excluded ones. </li></ul><ul><li>Exemption limit : To be enhanced from Rs 8 lakhs to Rs 25 lakhs. </li></ul><ul><li>Service Tax Refunds / Rebates: Need to take practical steps to avoid wasteful litigations. </li></ul>
  15. 15. Goods and Services Tax
  16. 16. Goods and Services Tax [GST] <ul><li>GST to eventually replace Central Excise, Service Tax, VAT & CST. </li></ul><ul><li>Centre has power to tax manufacture of goods (Central Excise) and provision of services (Service Tax). States have the power to tax the sale of goods (VAT & CST). </li></ul><ul><li>Taxation of Goods : Core CENVAT rate at 16% and State VAT at 12.5%. Taxation of services at 12%. </li></ul><ul><li>GST road map: </li></ul><ul><ul><li>Abolish CST – currently being levied at 3%. </li></ul></ul><ul><ul><li>Appropriate GST rate – 20% ? UK – 17.5%, France 19.5%. Japan, Singapore have a GST of only 5%. Canada : Federal & Provincial GST. </li></ul></ul><ul><ul><li>Empower States to tax specified services – same rate as goods. </li></ul></ul><ul><ul><li>Empower Centre to tax upto the retail stage. </li></ul></ul><ul><li>Challenges : Federal Structure, Determination of Centre & State Components of GST, whether to introduce a state levy on imports, Re-shaping administration. </li></ul><ul><li>High GDP growth years most suited for structural reforms in taxation. </li></ul>
  17. 17. Thank You