Circular 213/07/2024-GST: Clarifies GST Treatment of ESOP/ESPP/RSU from Foreign Holding Companies

Key Takeaways:

1. Transfer of securities/shares as ESOP/ESPP/RSU is not considered a supply of goods or services under GST.

2. Cost-to-cost reimbursement for such transfers is not subject to GST.

3. Additional fees or markups charged by foreign holding companies may be liable to GST under reverse charge.

4. The circular provides clarity on the GST treatment of cross-border employee stock benefit arrangements.

5. Right Click here and open Official Circular in new tab

Detailed Narrative:

Understanding ESOP/ESPP/RSU and Their GST Implications

Let's break down this circular in simple terms:

The Issue at Hand:

Imagine you work for an Indian company that's a subsidiary of a big international corporation. As part of your compensation package, you're offered shares in the parent company. This arrangement is common and can be called an Employee Stock Option Plan (ESOP), Employee Stock Purchase Plan (ESPP), or Restricted Stock Unit (RSU), depending on the specifics. But here's where it gets tricky: how should these arrangements be treated under GST laws?

The Confusion:

Some people were wondering if these transactions could be seen as the Indian company importing financial services from the foreign parent company. If so, would the Indian company need to pay GST on a reverse charge basis?

The Clarification:

The circular breaks it down for us:

1. What Are These Stock Plans?

- These are ways companies incentivize employees by offering them company shares.

- Whether it's called ESOP, ESPP, or RSU, the basic idea is the same: giving employees a stake in the company's success.

2. How Does It Usually Work?

- The Indian subsidiary offers this benefit to its employees.

- Employees choose to exercise their options.

- The foreign parent company issues the shares directly to the employees.

- The Indian subsidiary typically reimburses the parent company for the cost of these shares.

3. The GST Perspective:

a) On the Share Transfer:

- Shares and securities are neither goods nor services under GST law.

- Therefore, the transfer of shares itself is not a taxable supply.

b) On the Employee Benefit:

- This is part of the employee's compensation package.

- Services by an employee to the employer in the course of employment are not considered a supply under GST.

- So, no GST applies here either.

c) On the Reimbursement:

- If the Indian subsidiary simply reimburses the exact cost of the shares to the parent company, there's no GST implication.

- This is because it's just a transfer of securities, which isn't taxable under GST.

4. The Exception:

- If the foreign parent charges any extra fee, markup, or commission beyond the cost of shares, that extra amount could be subject to GST.

- In such cases, the Indian subsidiary would need to pay GST on this additional amount under the reverse charge mechanism.

Why This Matters:

1. Clarity for Businesses: Indian subsidiaries now have a clear understanding of their GST obligations (or lack thereof) in these arrangements.

2. Employee Benefits: This clarification ensures that valuable employee incentive programs can continue without unexpected tax complications.

3. Cross-Border Transactions: It provides guidance on how to handle these international arrangements from a GST perspective.

FAQs:

Q1: Does an Indian subsidiary need to pay GST when it offers employees shares in its foreign parent company?

A1: Generally, no. The transfer of shares/securities is not considered a supply of goods or services under GST, so no GST is applicable on the basic transaction.

Q2: What if the foreign parent company charges extra fees beyond the cost of shares?

A2: If there are additional fees, markups, or commissions charged by the foreign parent, these could be subject to GST. The Indian subsidiary would need to pay this GST under the reverse charge mechanism.

Q3: Are employees liable for GST on the shares they receive?

A3: No, employees are not liable for GST on the shares they receive as part of their compensation package. This is considered part of their employment terms and not a taxable supply under GST.

Q4: Does it matter if the arrangement is called ESOP, ESPP, or RSU?

A4: No, the GST treatment remains the same regardless of whether it's called an ESOP, ESPP, or RSU. The circular treats all these arrangements similarly for GST purposes.

Q5: If an Indian subsidiary reimburses its foreign parent for the cost of shares, is this reimbursement subject to GST?

A5: If the reimbursement is strictly on a cost-to-cost basis (i.e., only the actual cost of shares), then it is not subject to GST. However, any additional charges beyond the cost of shares could potentially be subject to GST.

Key Precedents:

1. Central Goods and Services Tax Act, 2017 (CGST Act)

2. Section 2(52) of CGST Act (definition of "goods")

3. Section 2(102) of CGST Act (definition of "services")

4. Securities Contracts (Regulation) Act, 1956, Section 2(h) (definition of "securities")

5. Schedule III of the CGST Act, Entry 1 (services by employee to employer)

CircularNo.213/07/2024-GST

F. No. CBIC-20001/4/2024-GST

Government of India

Ministry of Finance

(Department of Revenue)

Central Board of Indirect Taxes and Customs

GST Policy Wing

North Delhi, New Delhi

Dated the 26th June 2024

To,

The Principal Chief Commissioners/ Chief Commissioners/ Principal Commissioners/Commissioners of Central Tax (All)

The Principal Directors General/ Directors General (All)

Madam/Sir,

Subject: Clarification on the taxability of ESOP/ESPP/RSU provided by a company to its employees through its overseas holding company - reg.

Representations have been received from the trade and field formations seeking clarification regarding the taxability of Employee Stock Option (ESOP)/Employee Stock Purchase Plan (ESPP)/ Restricted Stock Unit (RSU) provided by a company to its employees.

2.1 It has been represented that some of the Indian companies provide the option to their employees for allotment of securities/shares of their foreign holding company as part of the compensation package as per terms of contract of employment. In such cases, on exercising the option by the employees of Indian subsidiary company, the securities/shares of foreign holding company are allotted directly by the holding company to the concerned employees of Indian subsidiary company, and the cost of such securities/shares is generally reimbursed by the subsidiary company to the holding company.

2.2 Doubts are being raised regarding taxability of such a transaction under GST, i.e. whether such transfer of shares/ securities by the foreign holding company directly to the employees of the Indian subsidiary company and subsequent re-imbursement of the cost of such shares/ securities by the Indian subsidiary company to the foreign holding company can be considered as import of financial services by the Indian subsidiary company from the foreign holding company and whether the same can be considered as liable to GST in the hands of Indian subsidiary company on reverse charge basis.

3. In order to clarify the issue and to ensure uniformity in the implementation of the provisions of law across the field formations, the Board, in exercise of its powers conferred by section 168 (1) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “CGST Act”), hereby clarifies the issues as under.

4. The companies are providing option of allotment of securities/shares to their employees as a means of incentivization and the same is commonly referred to as an Employee Stock Purchase Plan (ESPP) or Employee Stock Option Plan (ESOP) or Restricted Stock Unit (RSU). Such specific terminology usage depends on the agreed-upon compensation terms between the employer and the employee. ESPPs and ESOPs are typically presented as 'options' granted to employees, whereas RSUs take the form of awards or rewards contingent upon the employee meeting specific performance standards. Regardless of the terminology used, the fundamental essence of the transaction remains the same i.e. the allocation of securities or shares from the employer to employee as part of compensation package with the aim of motivating enhanced performance.

4.1 A transaction involving transfer of ESOP/ESPP/RSU to the employees of domestic subsidiary by the foreign holding company appears to involve the following steps:

• The domestic subsidiary company gives option/ facility of ESOP/ESPP/RSU to its employees as part of compensation package as per terms of employment.

• The employees exercise their stock options, either by purchasing shares at the grant price or by holding the options until they vest.

• The foreign holding company of the domestic subsidiary company issues ESOP/ESPP/RSU, which are securities/shares listed on the foreign stock exchange, to the employees of the domestic subsidiary company.

• The foreign holding company transfers the shares directly to the employees of the subsidiary company.

• The domestic subsidiary company generally reimburses the cost of such shares to the foreign holding company on cost-to cost basis either through an actual remittance or through an equity transfer as prescribed by the relevant Indian Accounting Standard.

• The employees hold the shares and may sell them at a later date, if they so choose.

4.2 The foreign holding company issues securities/shares as ESOP/SPP/RSU to the employees of the domestic subsidiary company on the request of the said domestic subsidiary company. However, Securities under GST Law are considered neither goods nor services in terms of definition of “goods” under clause (52) of section 2 of CGST Act and in terms of definition of “services” under clause (102) of the said section. Further, securities include ‘shares’ as per definition of “securities” under clause (h) of section 2 of Securities Contracts (Regulation) Act, 1956. Accordingly, purchase or sale of securities/shares, in itself, is neither a supply of goods nor a supply of services. Therefore, in the absence of such transaction, falling under the supply of ‘goods’ or ‘services’ as per GST Act, GST is not leviable on said transaction of sale/purchase/transfer of securities/shares.

4.3 Further, the companies offer ESOP/ESPP/RSU to their employees to motivate them to perform better, and to retain the employees, by aligning the interest of employees with that of company. The ESOP/ESPP/RSU is a part of remuneration of the employee by the employer as per terms of employment. As per Entry 1 of Schedule III of the CGST Act, the services by an employee to the employer in the course of or in relation to his employment are treated neither as supply of goods nor as supply of services. Therefore, GST is not leviable on the compensation paid to the employee by the employer as per the terms of employment contract which involve transfer of securities/ shares of the foreign holding company to the employees of domestic subsidiary company.

4.4 The foreign holding company directly transfers the shares/securities to the employees of the domestic subsidiary company on the request of the said domestic subsidiary company. Reimbursement of such securities/ shares is generally done by domestic subsidiary company to foreign holding company on cost-to-cost basis i.e. equal to the market value of securities without any element of additional fee, markup or commission.Since the said reimbursement by the domestic subsidiary company to the foreign holding company is for transfer of securities/shares, which is neither in nature of goods nor services, the same cannot be treated as import of services by the domestic subsidiary company from the foreign holding company and hence, is not liable to GST under CGST Act.

4.5 However, if the foreign holding company charges any additional fee, markup, or commission from the domestic subsidiary company for issuing ESOP/ESPP/RSU to the employees of the domestic subsidiary company, then the same shall be considered to be in nature of consideration for the supply of services of facilitating/ arranging the transaction in securities/ shares by the foreign holding company to the domestic subsidiary company. In this case, GST will be leviable on such amount of the additional fee, markup, or commission, charged by the foreign holding company from the domestic subsidiary for issuance of its securities/shares to the employees of the latter. The GST shall be payable by the domestic holding company on reverse charge basis on such import of services from the foreign holding company.

4.6 Accordingly, it is clarified that no supply of service appears to be taking place between the foreign holding company and the domestic subsidiary company where the foreign holding company issues ESOP/ESPP/RSU to the employees of domestic subsidiary company, and the domestic subsidiary company reimburses the cost of such securities/shares to the foreign holding company on cost-to-cost basis. However, in cases where an additional amount over and above the cost of securities/shares is charged by the foreign holding company from the domestic subsidiary company, by whatever name called, GST would be leviable on such additional amount charged as consideration for the supply of services of facilitating/ arranging the transaction in securities/ shares by the foreign holding company to the domestic subsidiary company. The GST shall be payable by the domestic subsidiary company on reverse charge basis in such a case on the said import of services.

5. It is requested that suitable trade notices may be issued to publicize the contents of this Circular.

6. Difficulty, if any, in implementation of this Circular may please be brought to the notice of the Board. Hindi version would follow.

(Sanjay Mangal)

PrincipalCommissioner(GST)