Employee Stock Option Plan (ESOP) is an option to purchase stock\/equity of the employer company at a predetermined price (mostly below its prevalent market value at time of grant) given to the employee by the employer company. The employee who agrees to ESOP scheme can exercise the actual purchase of Employer Company\u2019s stock\/equity on fulfillment of certain conditions like completion of tenure of service defined in number of years or a revenue target of the company. On fulfillment of the conditions (vesting) placed by the employer company, the ESOP is said to be vested with the employees. <\/p>\n\n\n\n
The difference between the grant price to\nemployees and market price of the shares is referred to as \u2018the discount\u2019 from\nthe employer company perspective. It is interesting to mention here the recent\njudgment pronounced by the Hon\u2019ble High Court of Karnataka with respect to tax\nallowability of the discount on ESOP as recorded in the books of accounts of\nthe company. On 11-11-20, the hon\u2019ble High Court of Karnataka has held that the\ndeduction of discount on ESOP as per books of accounts is an admissible tax\nallowance in computation of business income of the employer company. The legal\nprinciple emphasized by the High Court is that the discount on issue of ESOPs\nis not a contingent liability but an ascertained liability. The decision was\npronounced in the case of Commissioner of\nIncome Tax, LTU v. Biocon Ltd.<\/em> The High Court held that the difference\nbetween the grant price to employees and market price of the shares (\u2018the\ndiscount\u2019), as on the date of the grant, is an expenditure incurred for getting\nbetter or prolonged services of the employees for the purpose of business.\nHence, it is an allowable business expenditure under section 37(1) of the\nIncome Tax Act, 1961. The High Court clearly spelt out that the discount\noffered by the company was not short receipt of capital but expenditure for\nsecuring consistent services of the employees in order to earn\/enhance its\nbusiness profits. The High Court reiterated that it is a settled law that if a\nbusiness liability has arisen in the accounting year, the same is permissible\nas deduction, even though, liability may have to be quantified and discharged\nat a future date. That is, on exercise of option by an employee, determination\nof the actual amount of benefit is only quantification of liability, which\ntakes place at a future date. The High Court stated that where an ESOP vests\nover a period of a number of years (say, four years), then, it implies that employee\nhas a definite right to proportionate (say, 25%) of the shares at the end of\nfirst year and accordingly, the employer (taxpayer) is bound to allow vesting\nof 25% of the options and same becomes permissible business expenditure to that\nextent in that year. <\/p>\n\n\n\n At the time of exercise of the option by the\nemployee, the difference between the fair market value at that time and the exercise\nprice is taxable as \u2018Perquisite\u2019 in the hands of the employees and the employer\nis required to deduct tax at source, although no cash flows are received by the\nemployees on account of exercising ESOP. Further, when the shares are disposed\noff by the employees, they will attract Capital Gains Tax. Same can be either\nlong-term or short-term, depending on the holding period by the employees. <\/p>\n\n\n\n From an accounting perspective, ICAI has issued a\nGuidance Note for accounting for share based payments in September 2020 for enterprises\nthat are not required to follow Indian Accounting Standards. It provides that\nin case of employee share-based payment plan administered through a Trust, the\nstandalone financial statements of the enterprise should portray the picture as\nif the enterprise itself is administering the ESOP Scheme. This has two results\nviz., (i) the enterprise should recognize any expense arising from the\nemployee share-based payment plans, and (ii) the operations of ESOP trust\nare included in standalone financial statements of the enterprise insofar as\nthe ESOP is concerned. In such a situation, in the standalone financial\nstatements of the enterprise, \u2018Loans to ESOP Trust\u2019 will not appear at all\nafter making necessary adjustment entries. This would be in alignment with the\ntax treatment of the expenses allowable u\/s 37 as per the Karnataka High Court\njudgment as mentioned above. <\/p>\n\n\n\n Overall, it is concluded that ESOP is mutually\nbeneficial to the employer and the employees. On one hand, the employer can\nretain talented workforce, save cash flows, increase productivity and achieve\nenhanced profitability. This enhanced profitability further results in increase\nin market value and intrinsic value of the employer company\u2019s shares. On the\nother hand, the employee is motivated to put in best efforts as the employee\nbenefits if the company benefits, leading to a win-win situation. <\/p>\n","protected":false},"excerpt":{"rendered":" Employee Stock Option Plan (ESOP) is an option to purchase stock\/equity of the employer company at a predetermined price (mostly below its prevalent market value at time of grant) given to the employee by the employer company. The employee who agrees to ESOP scheme can exercise the actual purchase of Employer Company\u2019s stock\/equity on fulfillment of certain conditions like completion […]<\/p>\n","protected":false},"author":3,"featured_media":403,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_links_to":"","_links_to_target":""},"categories":[14],"tags":[116],"class_list":["post-402","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-esop"],"yoast_head":"\n