VCs Oppose India Options Tax

Kleiner Perkins Caufield & Byers has entered into a consortium of entrepreneurs and venture capitalists lobbying India’s minister of finance to rescind plans to tax stock options that companies grant to employees, partner Ajit Nazre told PEHub.com.

Minister of Finance P. Chidambaram announced the 35% options tax at the end of February in a speech to the India House of Parliament. The rule is scheduled to take effect on April 1. Experts say the move could slam the country’s nascent technology community.

“Some things make sense and some things don’t,” says Tahir Naim, an associate at Fenwick & West. “In all honesty, this is one that doesn’t.”

The tax would make it more expensive for a foreign-owned or domestic-based startup in India to pay its employees with stock options. Companies will be on the hook to pay 35% of the difference between the price at which a stock is granted and the price at which it is exercised. Companies are likely to pass this liability on to their employees as part of their options contract, Naim says, as options will likely be treated as a “fringe benefit” of employment.

It is unclear how companies that granted stock options before the rule goes into effect will deal with this new liability. Naim suggests that companies in India that have granted stock options encourage their employees to exercise them now, before the tax takes effect.

India, which uses a parliamentary government system similar to that of the United Kingdom, generally does not announce a budget until it has gained support for each inclued measure. Although this new tax treatment has not been formally ratified by the government, it is likely to pass without contest, Naim says.

As of 2005, the maximum federal tax on ordinary income was 30 percent. Income over $20,000 was taxed at 40%, Naim says. “It’s conceivable that an employee paid with options would have to pay 75% of their stock option gain over to the Indian government,” Naim says.

Entrepreneurs who receive lots of stock options might avoid the tax altogether by moving out of India, Naim says. “The government used to complain about a brain drain there,” Naim says. “If this doesn’t promote that, what does it promote?”