March 22nd, 2008 
krishna The government introduced fringe benefit tax (FBT) on employee stock options (ESOPs) in the 2007 Budget. FBT is payable by the employer on the ESOP benefits granted to the employees, upon exercise of the option by the employee. While enacting the law, a provision was introduced enabling the recovery of the FBT from the employees: In December 2007, the Central Board of Direct Taxes (CBDT) came out with its circular, providing some important clarifications.
Employees who work in different countries incur personal tax liabilities in the respective countries, including ESOP benefits. The CBDT has stated in the circular that where the employer has paid FBT on ESOPs provided to an employee based in India and subsequently recovered the FBT from him, the employee can claim credit for such FBT against the tax payable in his home country on such ESOPs.
FBT paid by the employer and recovered from the employee, according to the CBDT, amounts to a surrogate tax on the employer in respect of fringe benefits provided to its employees. Again, CBDT has stated that where an employee has paid tax in a foreign country in respect of ESOPs, such tax cannot be allowed as a credit against the FBT payable by the employer on such ESOPs.
The government’s stand in this regard is contradictory. On the one hand, it is not allowing credit for taxes paid outside India against FBT payable in India, in spite of stating that FBT paid by employer and recovered from employee is a surrogate tax on the employer. At the same breath, the government says that the employees from whom FBT is recovered by the employer will be allowed credit for such FBT against their personal tax liability in their home country.
Additionally, the allowability of tax credit in the home country of the employee is doubtful. Credit in the employee’s home country will be according to the provisions of the domestic tax laws of the country or as per the tax treaty which India has with -the respective home country. The Indian tax treaties do not specifically include FBT within the definition of ‘Indian taxes’ covered by the treaty. Further, the domestic laws of various countries, including the US, do not permit credit of Indian FBT in its current form against the personal income tax liabilities of the individuals (employees). Given this, the CBDT’s statement in its circular will not necessarily entitle the employee to obtain credit for tax payable in their home countries. The fundamental legal liability to pay FBT rests with the employer. Recovery of FBT from the employee is a contractual arrangement between the employer and employee which may not be sufficient to shift the legal burden even though the economic burden shifts to the employee. Further, the Indian government not granting credit for taxes payable by employees in foreign countries against the FBT payable by the employer in India, will also weaken the position overseas.
Given this, it would be better if the government initiates discussions with various countries, with which it has tax treaties, for including Indian FBT as a tax which is creditable in the respective treaty countries, whether through amendments to the treaty or through protocol. Australia, which also imposes FBT on various fringe benefits granted, by taxing right over the benefit if the value of the benefit were paid to the employee as ordinary employment income. The government can also consider an amendment to the Indian Income Tax Act in the ensuing Budget whereby FBT paid by the employer and recovered from the employee would be statutorily considered as tax paid by employee so that the employee can claim credit therefore in his home country. A retrospective amendment would enable the claim for the financial year 2007 -08 also.
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