A company may deploy several techniques to increase the productivity of its workforce in order to

achieve profit maximization. One such technique is to offer an employee share scheme to motivate the
employees and align their interests with the shareholders. Employee share scheme means any
agreement or arrangement under which a company may issue shares in the company to an employee of
the company or an employee of an associated company or the trustee of a trust and under the trust
deed the trustee may transfer the shares to an employee of the company or an employee of an
associated company. There are several ways to offer shares under the employee share scheme. The
company may offer them free of cost or may give the right to buy these shares at a reasonable price,
which is certainly lower than the market price of the respective share. However, the benefit that the
employee gets by this scheme is taxable under the Income Tax Ordinance, 2001. The benefit gained is
added to the head “Salary” and several things need to be considered for its treatment. Firstly, the
options given as the right to buy the shares are not taxed until the option is exercised. If you are given
the right for options but you do not exercise them and they get expired, no tax is chargeable as you did
not receive any benefit against those options. Moreover, if the employee exercises the option and there
is no restriction on the sale or transfer of those shares, the amount that is added to taxable income
would the fair market value of those shares at the issue date less the amount paid to buy those shares
under the employee share scheme less any amount given by employee to buy those rights to acquire
the shares. However, is there is a restriction on the transfer of those shares, no amount would be
charged to the head “Salary” until the employee has the right to transfer those shares, or the employee
disposes off the shares, whichever is earlier. The fair market value of the shares for this scenario would
be determined of the market value as of on the date the restriction gets lifted and not the market value
on the date the shares were issued. The amount deducted from the benefit would be the same as in the
previous scenario that is the sum of amount paid to buy shares and amount paid to buy the options for
acquiring the shares. If the employee sells off or disposes the rights to buy the shares, then he would be
charged under the head “Salary”, for any amount received against selling or disposing off those rights
less any amount that had been paid to buy those rights.

An example can be that on July 1, 2019, Abbas got 20,000 rights to buy shares at a price of Rs. 100/.
Moreover, there is a restriction on the transfer of those shares for 12 months if exercised. Abbas
exercised all his rights and bought the shares on July 1, 2020. The market value for the shares was Rs.
150/- per share on July 1, 2020, and Rs. 180/- per share on July 1, 2021.

In this scenario the amount that would be charged to “Salary” would be (180-100) * 20,000 = Rs.
1,600,000/-. Note that as there was a restriction on sale for 12 months that fair market value would be
taken as on the date restriction gets lifted.