Employee Stock Option Plan (ESOP) is a popular long term employee reward mechanism. Under India’s tax law, an ESOP benefit is taxable at the time of allotment of shares to the employee, upon exercise of the stock option by the employee. The taxable value of an ESOP is fair value of shares, over the exercise price. While this approach is relatively straightforward for employees who remain in the same country over the entire vesting period (period between grant date till vesting date), it becomes complex for globally mobile employees who move in and out of India during the vesting period.

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A typical ESOP gradually vests over three to four years. During this period, a globally mobile employee may spend part of the time in India and partly abroad. However, the current tax law does not prescribe the methodology for pro-rating ESOP benefit pertaining to India, which may result in tax litigation.

There are judicial rulings that emphasise that ESOPs represent compensation for services rendered during the vesting period and must therefore be allocated between countries based on the location where the services are rendered. These decisions highlight judicial orders in favour of apportionment.

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Applying this rationale, where employees qualify as Non-Resident or Not Ordinarily Resident in the year of allotment of shares (under the ESOP), perquisite value of ESOP, attributable on a pro-rata basis to services rendered in India during the vesting period, may be considered as taxable in India. Where individuals qualify as Resident and Ordinarily Resident of India, i.e. their global income is taxable in India, interplay of double taxation and related tax relief will need to be considered on case-to-case basis.

Also, globally, many countries (e.g. USA, Australia etc.) have adopted these principles to ensure certainty for both taxpayers and tax authorities. In India, although taxpayers informally rely on favourable jurisprudence, the absence of formal recognition implies that these principles are persuasive rather than binding, which may often result in contradictory assessments and appeals.

Hence, clear guidelines should be announced for apportioning ESOP in cross-border scenarios. The guidelines may include a standard formula or method based on the location of services rendered during the vesting period, to determine value of perquisite, as well as the cost of acquisition.

Above changes, if carried out, will help in easing tax litigations of globally mobile taxpayers.

The author is Partner, Deloitte India