Employee stock option plan (ESOP), employee stock purchase plan (ESPP), restricted stock unit (RSU) by foreign firms to their employees will not attract GST, subject to some conditions. This will benefit the likes of Google, Microsoft, Oracle and Walmart and a large number of tech companies and other MNCs whose Indian employees were getting the benefit from ESOP options. Most of MNCs and start-ups were facing tax demand and were locked in litigations over taxability of these ESOPs. However, if company charges additional, GST will be applicable on this.
Based on recommendations by GST Council, Central Board of Indirect Taxes & Customs (CBIC) has come out with detailed circular.
“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,” the circular said.
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, the board said. “The GST shall be payable by the domestic subsidiary company on reverse charge basis in such a case on the said import of services,” it added.
A transaction involving transfer of ESOP/ESPP/RSU to the employees of domestic subsidiary by the foreign holding company involves a number of 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.
Ending disputes
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.
Experts feel the latest circular will end disputes between tax department and Indian companies. Ankit Joshi, Associate Partner with N.A. Shah Associates, said Tax Department at Centre and States were issuing notices on the Indian entity demanding GST on the reimbursement of cost of shares to Head Office under the reverse charge mechanism (RCM). Now the latest circular will have a favorable impact and clarity for MNCs and their subsidiaries in India, he said.
Brijesh Kothary, Partner with Khaitan & Co felt that with the latest circular, the authorities have said that the Indian subsidiary is obligated under employment contracts to provide shares to employees, as the subsidiary acts as the employer, and that the subsidiary imports services from its foreign holding company. As long as the shares form the subject matter of a transaction, they qualify as transaction in securities and under GST laws, they neither qualify as supply of goods nor as supply of services and hence not liable to GST.
“Though this circular is issued in context of an arrangement between foreign holding and Indian subsidiary, in my view, this will also apply for arrangements between Indian holding and subsidiaries,” he said. Further, the companies that have been issued notices or have paid taxes during the course of investigation may consider seeking relief by citing the circular.