The tax implications of an ESOP have a significant impact on the company's employees. The taxation laws that apply to a multinational corporation differ from one country to another.
The Impact of Taxes on ESOPs
ESOPs were initially taxable under the fringe benefits tax. However, subject to amendments made after the Finance Act of 2009, the taxability of ESOPs is in the hands of the employees.
Taxability from the perspective of the Employer
In India, there has always been a general sense of ambiguity about the deductibility of ESOP expenses. It has always been a source of contention. In the employer's case, because the ESOP discount is a general expense, the point of contention has always been whether it should be treated as a general provision under Section 37 of the Income Tax Act of 1961.
Section 37 (1) allows a deduction for expenses that are neither personal nor capital in nature and are not covered by Sections 30 to 36. However, various judgments have been rendered in favor of the employer, stating that the expense incurred by the employer is to be treated as allowable.