P. Chidambaram with Ficci president Habil Khorakiwala in New Delhi on Monday. Picture by Ramakant Kushwaha

New Delhi, March 5: The government will consult industry before formulating rules to tax Esops (employee stock options), which have been brought under the fringe benefit tax (FBT) in this year’s budget.

“It is a fringe benefit and it will be taxed. The method of tax evaluation will be done … we will sit down and consult industry to see how Esops can be taxed, finance minister P. Chidambaram said in his second interface with industrialists after the budget.

The government would also consider extending the benefit of 150 per cent weighted deduction on research and development to companies across sectors, Chidambaram added.

He was addressing India Inc at a meeting organised by the Federation of Indian Chambers of Commerce and Industry (Ficci). The FBT on Esops will be payable by the company and also apply to Esops not encashed.

Industry apprehends that taxing Esops could take away a company’s ability to retain talent. Companies are contemplating not giving Esops anymore. “We may have to reconsider giving Esops,” said Deepak Ghaisas, CEO, i-flex solutions.

Companies are worried that FBT may be levied on the difference between fair market value as on the date of exercise and the Esop issue price. This could be a large amount of money.

Meanwhile, ruling out any reduction in corporate tax rates, Chidambaram said they cannot go down any further unless exemptions are removed.

“The effective tax rate is not only moderate but very moderate... in India, it is 19.2 per cent. Show me one Asean country which has an effective tax rate of less than 19 per cent,” he said.

On a suggestion that a committee should look into moderation of corporate tax rates, Chidambaram said, “While I welcome your offer to join a committee to examine what the moderation would be, that committee should also examine how the effective tax rate can rise to the Asean level.”

He said the removal of 10 per cent surcharge on corporate tax for small firms and companies was an indication that the government wants moderate taxes.

“Twelve lakh small firms and companies have been immediately given relief of 3 per cent... that’s an indicator of the line we are pursuing for the future, we want taxes to moderate, we have moderated taxes, the moderation has applied this year to small firms and companies,” he said.

Inverted duty

The government today said it is committed to correcting any inverted duty structures that may have arisen in the budget.

“Our objective is to correct any inverted duty structure if it adversely affects the domestic industry....We would look at it,” revenue secretary K.M. Chandrasekhar said at a post-budget interactive meeting with the CII.