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Clarification on the Taxability of ESOPs, ESPPs and RSUs Issued by Overseas Holding Companies

Introduction

The Central Board of Indirect Taxes and Customs (‘CBIC’) has released a comprehensive clarification on the taxability of Employee Stock Options (‘ESOP’), Employee Stock Purchase Plans (‘ESPP’), and Restricted Stock Units (‘RSU’) provided by companies to their employees through their overseas holding companies. Issued in a recent Circular[i] dated 26.06.2024, this clarification aims to standardize the interpretation and application of Goods and Services Tax (‘GST’) laws on such transactions.

Key Highlights

A.  Background and Need for Clarification:

  • The CBIC issued this Circular to clarify the taxability of ESOP/ ESPP/RSU provided by companies to their employees through their overseas holding companies.

  • Representations were received seeking clarification on whether such transactions are liable to GST when the foreign holding company directly issues shares to employees of the Indian subsidiary, and the subsidiary reimburses the cost to the holding company.

B.  Transfer of ESOP/ESPP/RSU to Employees by Foreign Holding Company

  • Domestic subsidiary companies offer employees ESOP/ESPP/RSU as part of their compensation package.

  • Employees exercise stock options by purchasing such shares at grant price or holding until vesting.

  • Foreign holding company issues and later transfers these securities/shares to domestic subsidiary company’s employees.

  • Domestic subsidiary companies reimburse the cost of shares to foreign holding companies on a cost-to-cost basis, either through an actual remittance or through an equity transfer.

  • Employees hold shares, with the option to sell them later if desired.

C. Taxability Concerns:

  • The main question was whether the transfer of shares/securities by the foreign holding company to the employees of the Indian subsidiary and the subsequent reimbursement constitutes an import of financial services, thus making it liable to GST under reverse charge.

D.  CBIC’s Clarification on GST Liability:

  • Securities, including shares, are neither goods nor services under the GST Act (as per s. 2(52) of the CGST Act and s. 2(h) of the Securities Contracts (Regulation) Act, 1956). Thus, the sale/purchase/transfer of securities does not constitute a supply of goods or services and is not liable to GST.

  • The remuneration paid to employees by the employer in the course of employment, including the transfer of securities/shares, is not considered a supply of goods or services (as per Entry 1 of Schedule III of the CGST Act). Therefore, GST is not applicable to such transactions.

E.  Additional Fees or Charges:

  • If the domestic subsidiary reimburses the foreign holding company on a cost-to-cost basis (without any additional fee, markup, or commission), this transaction is not treated as an import of services and is not liable to GST.

  • If the foreign holding company charges any additional fee, markup, or commission for issuing ESOP/ESPP/RSU, this amount is considered consideration for the supply of services. GST is applicable on this additional amount, and the domestic subsidiary must pay GST on a reverse charge basis.

Our Analysis

The CBIC's circular clarifies that transactions involving ESOPs, ESPPs, and RSUs issued by overseas holding companies are generally not subject to GST, as securities and shares are not classified as either goods or services under the GST Act. However, if the foreign holding company charges additional fees, markups, or commissions for issuing these securities, such charges would be subject to GST, with the domestic subsidiaries required to pay this tax under the reverse charge mechanism. This guidance aims to provide clear and consistent directives for compliance, ensuring adherence to GST regulations across various sectors.

 





End Note

[i] CircularNo.213/07/2024-GST






Authored by Pratima Ajmera, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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