Expectations are high as Chidambaram has dropped broad hints about his willingness to modify the two controversial proposals made in his budget speech.
NEW DELHI: Finance minister P Chidambaram’s reply to the debate on the Finance Bill, 2007, in the Lok Sabha on Thursday will be closely watched for any rollback of two key budget proposals: one, the export duty on iron ore, and two, the fringe benefit tax (FBT) on employee stock options (Esops).
Expectations are high because Chidambaram has dropped broad hints about his willingness to modify the two controversial proposals made in his budget speech on February 28.
Official sources said the finance minister is set to waive the Rs 300 per tonne export duty on iron ore fines while retaining it for higher grades of iron ore. Similarly, insofar as FBT on Esops is concerned, he is inclined to accept a proposal submitted by the software industry body, Nasscom, and tax Esops as perquisites in the hands of the employee rather than as FBT at the company end.
Chidambaram, during the stage of “general discussions” on the budget in Parliament in March, had hinted at the possibility of taking a relook at the duty on iron ore. “There are two viewpoints. While the steel industry has supported the export duty, iron ore exporters have pleaded for reconsideration of the duty on iron ore fines. We shall consider all the facts and circumstances objectively and take suitable decisions”, he had promised.
Officials said iron ore fines have no use in the country and even domestic steel producers do not mind if they are exported. The duty on iron ore lumps, on the other hand, seems to have found grudging acceptance after the initial reluctance shown by Chinese steel mills about importing the raw material at higher cost. In the short run, the duty may not hit iron ore exports as such, but over the medium term it will encourage value-added products export rather than raw materials.
As for the FBT on Esops, the finance minister had indicated that the government was open to modifying its plans if industry came up with an alternative. Officials said the finance ministry is firm on the principle that gains made from Esops must be taxed, but it wouldn’t mind modifying the budget proposal of charging FBT if Esops are taxed as perks in the hands of the employee.
Nasscom had argued that IT companies in India offer Esops to their employees in order to retain them with the company. In a stock option plan, options vest with the employee for three to seven years. During this period the employee cannot transfer the shares. After the option period, the employee can acquire the shares and sell them. If he sells the shares before one year, he ends up paying a short-term capital gains tax of 10%. But if he sells the shares any time after one year, he pays no tax on capital gains.
There is a precedent for taxing income, or gains out of Esops, as perquisites in the hands of employees. During 1999-2000, Esops were taxed as perks based on the difference between the fair market value of the stock when Esops were issued and when the options were exercised.
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