The tax imposed on the Employees Share Option Scheme (ESOS as implemented under the 2006 Budget and tabled in Parliament by Finance Minister Abdullah Ahmad Badawi is absurd, borders on idiocy and burdens the working class.

Under 2006 Budget proposal, which has now become law, employees who have been granted with ESOS have to pay tax on the difference between the offer price and the price of which they exercised their shares. It has to be noted that exercising their shares does not mean they have sold their shares. For as long as their shares are deposited in their Central Depository System (CDS) account, they have to pay tax. In other words, the shares become taxable even before they sell them.

The government's reasoning is this: to protect employees if the share prices fall. But my question is this: 'Will anyone in their right mind exercise their shares if the prices fall below the offer price?' In actual fact, it does not protect the employee at all.

Let me demonstrate the employees' predicament by giving this simple calculation of the tax structure which came into force in 2006. An employee is granted 10,000 units of shares by his company at RM5 for each share. The price of the shares then goes up to RM8. The employee exercises his shares and pays RM50,000. The shares are then deposited into his CDS account. Automatically, he is given a mere six months to pay the tax. But what if the share market collapses and the price goes below RM5 before he gets a chance to sell his shares?

I am not a legal expert, but I do think the ruling is unconstitutional as it is retrospective. Let me cite the case of Maybank employees who were offered the ESOS in 2001, exercisable over five years. The employee who accepted the ESOS in 2001 had no clue that such a ridiculous tax ruling would be imposed in 2005 (to be enforced in 2006). So when he exercises his 30 percent shares in 2006 (proposals tabled under Budget 2005 become law in 2006), he will have to pay 28 percent tax from the difference between the offer price and the price of which he exercised his shares. He is caught off-guard.

Laws cannot be retrospective. Here's an example. Imagine the government imposing the death sentence for rapists in 2007. All those who commit rape after the law is gazetted will be sentenced to death. That's fine. But you cannot impose the death penalty on those who committed rape in 2006 or earlier. That's unconstitutional.

The officers at the Finance Ministry who drafted the proposal on ESOS as tabled in the 2006 Budget lacked wisdom. The proposal was ill-thought and was not in consultation with the relevant parties like unions, etc.

ESOS is part of the benefits given to loyal and dedicated staff. Tax imposed on ESOS negates the very purpose it is given to employees. ESOS is meant to boost morale and with that, their productivity and contribution to nation-building. It should actually be tax-free.

The government, led by Abdullah, is stressing on the importance of human capital. If this is the case, the government should re-look at some of its policies involving the country's human capital. This will include reviewing its tax policies on ESOS. Imposing tax on monetary gains from shares bought from the open market is acceptable because only those who can afford it buy shares. ESOS, on the other hand, is given to salary-earning employees, most of whom have to seek financing to exercise their options.

Due to this ridiculous tax ruling, ESOS has become a burden on the worker rather than an incentive.

I surely hope, Budget 2008 - which will be tabled in Parliament by Abdullah on Friday - will abolish tax on ESOS. Otherwise, his ruling Barisan Nasional is going to face a tough time in the forthcoming general elections.