I used to study taxes. Now I just pay them.

But when a major tax change is proposed with practically immediate effect without any apparent forethought about its overall ramifications then I am forced to come out of my self-imposed retirement of the last ten years with respect to commenting on the details of a particular tax measure.

I must admit that I am just a bystander with no detailed knowledge or appreciation of the Indian tax system. But in my practicing days in the United States and the United Kingdom I used to be considered a reasonably proficient consultant on tax and finance matters.

Also as a resident of Silicon Valley you would expect me to have some exposure to the whole issue of stock options, ESOPs or sweat equity (a strange term when most of the beneficiaries generally hold white collar jobs). It is from that perspective that I now write this piece.

I could start by questioning whether the spread on tax options can -- in common English and established global tax parlance -- even be considered a 'fringe' benefit. As a purist I could argue that the term 'fringe' refers -- among other outlying things -- to the hem of a dress or the small 'outside the norm' elements and therefore cannot even apply to substantial items as is the case with stock options in many industries.

Tax practitioners in other countries will probably agree that to put stock option spread in the same bucket as a company car or suit may somehow demean both. But enough of that because no one in India is seeking to challenge this particular proposal on the grounds of bad usage of the English language.

My concern with the proposal to apply Fringe Benefit Tax (FBT) to the spread on stock options at the date of exercise is not that it is clearly in respect of services as an employee, but more that its incidence and impact on other tax issues have not been thought through.

If it has, there is no indication of it other than a lame 'wait for the rules' comment. That comment is usually code for 'we have no clue what we have done so please educate us and we will try to fix it.'

I thought the chicken or egg still remains a conundrum, but the issue of the cart and the horse was long settled. It is therefore disconcerting that announcements are made to do something without study and then George W Busheadedly clung to in the hope that the ensuing debate and due diligence will result in a palatable result.

I know that as I write, some of the best tax and other brains in India are in fact preparing the detailed representations to be made to the 'concerned (I often doubt it) persons.' As this is more a tongue in cheek piece, my thoughts should be given their due weightage, but for what it is worth here are my ten points regarding this proposal.

1. No one seriously believes, even in Silicon Valley, that stock options are NOT for services and therefore prima facie they are a component of overall compensation. So, yes, some form of taxation is appropriate. But what should be the amount of the attributed income, who is the taxpayer, what tax regime it falls under -- income, capital gain -- its timing, calculation and amount should all be carefully considered before proposing the tax.

That appears to be missing in the present case. Perhaps, an RTI (Right to Information) request will indicate the amount of detailed study undertaken before the proposal was introduced.

2. With respect to the timing, the proposers of the tax would possibly argue that they have satisfied the general 'wherewithal to pay' standard for all taxes by imposing it on the company as an FBT, rather than the employee who on the date of exercise has the burden of finding the cash to pay for it let alone any associated taxes.

But it ignores the fact that many companies in their early stages often give stock options to hire and retain talent because they do not have the ability to pay large cash wages. Now they have to pay the tax on something they could not afford to pay before.

On that score has anyone considered the impact of this proposal on early stage entrepreneurial companies?

3. On the amount to be taxed there appears to be no thought given to why the tax itself, if paid by the company and passed on to the employee as most will, is not itself a deduction of the amount on which the tax can apply. Clearly the true exercise price for the employee is the grant price plus the FBT which he or she will have to bear under the terms of most ESOP schemes.

4. Following on from this what is the cost basis for the employee for capital gains calculation when he eventually sells the shares? Similarly, if the company recovers the tax from the employee what is the nature and taxability of that receipt in the hands of the company? Perhaps, this issue has already been addressed and resolved in the context of other recoveries of FBT from employees.

5. I believe that FBT is not a deductible tax in India. I will not labour the illogicality of denying a deduction of a company expense calculated on deemed wages which if paid as cash wages would have been deductible.

But unlike the other elements on which FBT is payable, the new proposal on the spread in stock options refers to a tax on a notional amount which is not in the companies' books and there is no associated cash expense. Surely if this notional amount is now subject to tax, should not the spread itself (forget the FBT on it) be then given as a tax deduction to the company as an additional wage expense?

If it is not, does not tax policy favour cash wages to stock compensation thereby perversely reversing the logic on which the tax proposal is presumably based.

6. FBT is applied on definite amounts spent by the company. The spread on tax options is an uncertain amount and will vary depending on when an employee exercises the option. Has anyone considered that this makes a company 'which is a distinct legal entity with its own governance' incur an expense determined by others?

Should the Securities and Exchange Board of India, the Reserve Bank of India or the Company Law Board have something to say about this circumvention of a company's powers? Also, is there now an incentive on the part of the company and the employee to manipulate the exercise date rather than the grant date which has been the focus of the investigations on backdating and spring-loading of option grants in the US?

7. One woman's income is another woman's expense. Tax purists do not like double taxation of the same income. Presumably, even in India that is the rationale (undermined by a dividend distribution tax) on which corporate profits when distributed are not taxed in the hands of the shareholder. Under that rationale I have already suggested in 3, 4 and 5 that some taxpayer-corporate or individual should benefit from any income/expense attributed or borne by another. But if the final rules do not provide any relief to anyone there is an inequity.

In those circumstances, when it comes to a non-deductible tax like FBT borne by a company based on the market value on a date not of its choosing, should not there be an ability to claim back the FBT if the market value of the shares drops, say, at the end of the year? Complicated, definitely. Fair, possibly. Recommended, maybe.

8. The FBT applies to an issue of shares at no cost or below FMV (free market value) to be defined. So an option is taxable not at grant but on exercise. But on the date of exercise, the person may not be employed at the company. Why should a company which has not had the benefit of the employee's services since he left have to pay tax on any increase in the value of the company's shares since that date?

9. I always look at what alternatives a company could have used if it knew about any new tax proposal well in advance and particularly in this case when it was devising its overall compensation policy. Stock options are an attraction as well as a retention tool.

The retention part requires that there is some delayed vesting of the options. During that period the shares could increase or decrease in value. But I could also suggest that as far as the company is concerned any grant of fair market value options to be exercised later is only a forbearance on the part of the company to seek current payment for those shares. If the company had 'issued' restricted shares at the same fair market value but removed the restrictions based on time, performance, etc then a fair market value option will presumably result in an FBT of zero.

The same result would occur if the company had arranged for the employee to borrow funds from a bank to pay for the shares at the time of the grant. If the company could have done that -- and many may in view of this new proposal -- then the fringe benefit to the employee is arguably only the interest on the deemed loan for the exercise price which the company has not received.

So why call the whole spread a fringe benefit?

10. All of the above and hundreds more issues, I could articulate, invent or pontificate about if my natural boredom with any one concept or issue had not caught up with me.

So I will finish as I started. This is not a serious article on taxation. I am incapable of that any more if I ever was. But somewhere in the text above are issues and connections and discontinuities which will be faced and need to be addressed.

Thinking up new ways of taxing people and corporations while claiming that you have not increased the tax rate may sound convincing to those who voice it but does not fool anyone anymore.

Now to paraphrase Donald Rumsfeld (Thank God, he is gone): "In life there will unfortunately always be haves and have-nots. Even what they have is different so many haves are also have-nots of something. While at a macro level it is absolutely essential to ensure that tax policy should definitely be used to convert the have-nots into haves and not the other way around, the have-nots of something always want the haves of those things to become have-nots of them.

So while the drama of crafting a workable solution unfolds, I will just sit back and rejoice with my animals who can now have more because their food is cheaper. Brings a new meaning to the term going to the dogs.

Sridar Iyengar is an independent mentor capitalist for early-stage companies. He is former chairman and CEO of KPMG India. He is an Independent Board member of several leading companies like Infosys Technologies, ICICI Bank, rediff.com, and OnMobile. He has also served as President of TiE. He is also President of Foundation for Democratic Reforms in India, a US-based non-profit organisation.