As Google Chief Executive Sundar Pichai arrives in India for his first visit after taking up the top chair, employees at Google India are expressing their unhappiness over a new tax they are forced to pay because of Google’s restructuring into Alphabet.
Google rebranded itself as Alphabet in August and made the Google brand a subsidiary of Alphabet, which included the entire suite of existing Google products and services including Gmail and Google search. Alphabet, the parent company, got all futuristic projects such as the drone delivery programme, driverless car and unannounced Google X projects.
Due to the restructuring, Google India employees who held employee stock options (ESOPs) of Google were in turn given Alphabet stocks. According to Indian tax laws, the change is seen as a sale of stocks, which entails capital gains tax up to 35 per cent.
“Any Indian resident holding stocks of an unlisted company has to pay capital gains tax when a share transfer takes place within the restructured company,” said Preeti Khurana, chartered accountant at Cleartax.in. The tax will be paid on the increase of the stock value since the time the employee exercised her stock option.
“The new tax came in as a shock as none of us knew that we’ll be forced to pay more than 20 per cent tax even without selling the shares. I am made to shell out ₹80,000 extra because of this transaction,” a Google India employee told BusinessLine on condition of anonymity.
Compensation sought Many employees want Google to compensate for the additional and unexpected tax that they are forced to pay. Google did not respond to queries from BusinessLine about the company’s plans to offset the impact of the restructuring transaction on its India employees.
The additional tax is applicable only on Indian employees due to local taxation laws.
An employee who is not immediately interested to sell off her shares, would be forced to pay taxes three times on the stock by the time she sells it. First, consider the employee receives the stock at a discount of 10-20 per cent. At the time of receiving the stock, the 10-20 per cent discount is considered as income and regular income-tax as per tax slabs is applicable.
Second is when the restructuring transaction takes place. Now, if the employee has held the stock for more than three years, he is liable to pay a flat 20 per cent long-term capital gains tax. In case, the stock was held for less than three years, a short-term capital gain, which is treated as income-tax can be as high as 35 per cent depending on the employee’s income.
Finally, when the employee decides to sell the stock, she again has to pay the tax based on the appreciation of the stock value since the restructuring. In effect the tax is paid thrice and can take away the very benefit of all the discounts and gains that ESOPs offer.
“ESOPs often seem to be lucrative to employees but this multiple taxation on ESOPs of unlisted companies can make them very less attractive. Companies often do not explain this tax structure to an employee before offering ESOPs,” explained Ashu Goenka, a New Delhi-based independent chartered accountant, who is getting queries from many Google employees regarding the tax.
“If you sell stocks of an Indian company, you get the benefit of long-term capital gain after holding it for one year. However, for unlisted stocks or stocks listed outside India, long-term capital gain is applicable only after holding the stock for more than three years,” Goenka explained.