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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