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Budget Amendments 2007: FBT on ESOPs clarified, cement spared


Budget 2007 has new amendments:. The finance minister has announced a change in the ESOP FBT concept – now the FBT will:
a) be levied on the date of vesting
b) be passable to the employee.

Only b) is good for the company – that means the FBT levy is not on the company and will not impact earnings.

For you as shareholders, what this means is that employees will most likely exercise at least part of their shares on vesting, to pay the 33% tax. Typically 1/3rd of the shares that vest will be exercised, to pay the FBT, which is 33% of the difference between the exercise price and the market price. This exercise will result in fresh shares being issued and therefore impacting EPS.

If you think that is not much, think again. Infosys is showing 3% lower EPS growth next year because of the impact of exercised options. That is HUGE – their profit will grow 25% or so but their EPS by 22%, they say, due to the exercised option impact.

Another thing in the amendments is for cement manufacturers: From a flat duty structure of Rs. 600 per tonne, for cement priced above Rs. 190 per bag, the FM has proposed to make this a 12% duty instead. That means for cement priced at Rs. 200 per (50 kg) bag, you pay Rs. 24 as duty, translating to Rs. 480 per tonne. This is perhaps cheaper than eariler but still quite a bit higher than the pre-budget duty of Rs. 350 per tonne. But cement companies which have been hammered by the budget impact may see some relief with this move.


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