FBT Credit

Under the provisions of the Income tax Act, the employer is required to pay FBT on the benefit arising on allotment of shares made under an ESOP to its employees.

As per the Central Board of Direct Taxes (‘CBDT’) guidelines, FBT is a surrogate tax on the employer. As such, the FBT paid by the employer in respect of an expatriate employee based in India and subsequently recovered from him, effectively becomes the employee’s cost burden. In a way therefore, FBT can be compared with the extant withholding tax provisions, wherein the employer is required to withhold tax on payments made to employees that comprise of income taxable under the Act.

However, the apparent difference in FBT provisions is that the benefit derived on allotment of shares by the employer to the employees, is currently, not taxable in the hands of the employees. Hence, it is challenging to term the amount recovered by the employer from the employee, as “income tax”.

CBDT ESOP’s guidelines (vide Circular No 9 dated December 20, 2007) prescribe that it will be possible for the expatriate employee to claim credit of such amount on account of shares allotted or transferred under ESOPs by the employer in India. For this purpose, even though no specific form has been prescribed, the employer will have to issue a certificate certifying the amount recovered from the employee without any corresponding disclosures in his return of income.
In India, the tax on such ESOP benefits is paid by the employer, but in many foreign countries the expatriate employees themselves are liable to pay tax on the benefit arising. With different taxpayers, the expatriate employee would have difficulty in claiming credit of such tax in his home country.

Besides, in most of the tax treaties that India has signed, the term ‘tax’ is defined to mean “income tax including surcharge thereon”. There are certain treaties, which cover identical or substantially similar taxes in the definition of the term of ‘tax’. But, none of the treaties specifically cover FBT. Hence, this could lead to a situation where the foreign country may not allow the credit for amount recovered from the expatriate employee in India against taxes actually payable by them.

Then, the question that arises is whether the foreign employer who has paid FBT on ESOPs can claim credit in respect of the FBT paid in India against income tax payable in his own country. Here too, the situation is no different, as the foreign employer will encounter a similar problem, given the non-inclusion of the term FBT in the definition of ‘tax’ in treaties. Hence, it would be difficult for the employer to claim credit for FBT paid in their country of residence. Interestingly, even in the tax treaties, which were recently entered by India with some countries like Iceland and Kuwait, FBT has not been included in the meaning of the term ‘tax’. Given the above uncertainties, perhaps there is an urgent need for proper clarification by the tax authorities on how to deal with the issue surrounding FBT credits, both for employees as well as for the employers