labels: economy - general, writers & columnists
What''s wrong?news
01 January 1900
The result: it has decreed that the difference between the option price and the (higher) market price would be considered a perk (or salary income) in the hands of the employees, and taxed in the year in which the option is exercised. Let’s see some of the things that are wrong with this reasoning:

  • When an employee exercises an option he is taking money out of his bank and placing it in the shares of a company. That is called investing, Mr Sinha, not being paid a salary.
  • How would you treat a person currently earning Rs 1 lakh when he accepts an appointment letter to join another employer at Rs 1.5 lakh three months later? Merely because he has accepted the appointment letter, would you calculate his salary at the rate of Rs 1.5 lakh between now and the day he joins the new job? If not, why not – since he has already exercised the option of taking a higher salary in the future? How is this different from exercising a stock option?
  • Suppose an employee is forced to pay income tax on exercising a stock option to pay Rs 1 lakh to buy shares valued at Rs 1.5 lakh in the market. Then assume the employee is forced to sell the shares a year later at, say, Rs 50,000, because the entire market is down or the company has done poorly. Will the government give him a tax rebate? Unlikely, given the technical problems there. Also, clearly he cannot claim a capital loss since the government doesn’t see the earlier "gain" as a capital gain but treats it as income instead. It’s a lose-lose situation for the employee.
  • The employee can make a gain as and when he sells the shares acquired through exercising a stock option and if he gets a higher price. That is the time when the government should tax him, not earlier. And it should charge him capital gains tax, not income tax. Which means that he should also get the benefit of the long term tax rate if he chooses to hold the share for over a year.
  • There’s no misuse here. There will be one if the government misuses its powers to impose an unfair tax on people.

The fact is that while a stock option is certainly a benefit in a general sense, it is certainly not a perquisite in terms of taxation. A perquisite is something that can be enjoyed in the tax period. Merely exercising a stock option doesn’t enable the employee to enjoy anything at all, except a happy feeling that some day in the future he will be richer. Maybe. Why does the government want to tax happiness?

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What''s wrong?