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Prasoon S Majumdar
Editor, Economic Affairs - The Sunday Indian
Dean Academics (All India), The Indian Institute of Planning and Management

The romance with equality

Taxes on ESOPs are both irrational and regressive.

Prasoon S. Majumdar

Editor, Economic Affairs

The Sunday Indian

Have you ever wondered as to why entrepreneurs like Narayana Murthy always urge the government on taxing the IT industry whereas every other entrepreneur representing Indian industry always cribs of tax cuts from the very same government? The answer to this puzzle lies in the fact that other than the sunrise industries like IT, every other stakeholder of the Indian economy has been percieved by the government as astute criminals (as if they are constantly looking for avenues to evade taxes). It is this very perception which when flows from the Ministry of Finance to the taxmen, makes taxes a regressive measure in our economy. It is unfortunate that whenever our honourable Finance Minister talks about taxes in his budget speech it gives a feeling that somehow he has completely failed in sensitising with Indian tax payers at large.

Historically, the objective of progressive tax was to bring about equality in the society and never with a motive of strangulating those who actually make the economy tick. Our Finance Minister unfortunately has fallen short of it by miles. A case in point is the proposed tax on ESOPs (Employee Stock Option Plan). Each and every industry and apex body has been crying hoarse on the ESOP tax as they feel that the cost of hiring, retaining and motivating employees would go up as most of the companies have been using ESOP as a strong HR tool to attract and retain talent. The FM’s declaration has given rise to a heightened debate on this issue. But what is emanating from these debates indicates that unfortunately both the FM and the industry are missing out on the larger picture as far as ESOPs are concerned. In this age of unabashed capitalism, where markets rules the roost, it is measures like ESOPs that help restoring a humane balance by broadening the ownership of capital. It has been observed that in a Capitalist system the gap between the haves and have-nots keep on increasing as neither salaries & wages nor any amount of taxes can bridge the gap between the employer and the employee’s income. It is only when the employees are made owners of the companies through ESOPs that this gap is arrested and equity restored. In such a scenario, to tax ESOP is completely irrational.

Empirical studies have proved that in countries like Japan where employee ownership through financial participation is most advanced (more than 90% of the listed Japanese firms and 60% of all corporations had introduced ESOPs long back), productivity per employee is remarkably high. The same holds true for other industrialised nations like Belgium, UK, Italy and the US too. It seems that our FM has either overlooked or is ignorant of the fact that a tool like ESOP not only helps to enhance productivity of companies, which in turn generates more revenues for the government but also broadens the ownership of capital. How can our FM ever forget that back home ESOPs have made millionaires out of car drivers and guards! My question is that can any FM, through any tax measure, ever guarantee to make our common citizens like the drivers and gaurds, millionaires? If they can’t, then every measure to disincentivise such schemes through taxes is nothing less than being regressive and every argument to justify the same, repressive where equality gets reduced to a romantic idea or practically ziltch.


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