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ESOPs by foreign companies to employees of domestic subsidiary not to attract GST: CBIC

This clarification forms part of the 16 circulars issued by the Central Board of Indirect Taxes and Customs (CBIC), following the meeting of the GST Council on June 22.
Last Updated : 28 June 2024, 08:49 IST

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New Delhi: ESOPs given by foreign companies to employees of its Indian subsidiary at prevailing market value will not attract GST, the CBIC has said.

However, Employee Stock Option (ESOP)/Employee Stock Purchase Plan (ESPP)/ Restricted Stock Unit (RSU) provided by a foreign company to its India subsidiary employee would come under GST net if an additional amount over and above the cost of securities/shares is charged by the foreign holding company from the domestic arm.

This clarification forms part of the 16 circulars issued by the Central Board of Indirect Taxes and Customs (CBIC), following the meeting of the GST Council on June 22.

Some 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 the terms of the contract of employment.

In such cases, on exercising the option by the employees of an Indian subsidiary, the securities of a foreign holding company are allotted directly by the holding company to the employee. The cost of such securities is generally reimbursed by the subsidiary company to the holding company.

Clarifying the doubts raised regarding the taxability of such a transaction under the GST, CBIC said reimbursement of such securities is generally done by a domestic subsidiary company to a foreign holding company on a cost-to-cost basis -- 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 the 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.

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 India arm, 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.

In such cases, 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 a reverse charge basis on such import of services from the foreign holding company, the CBIC said.

Moore Singhi Executive Director Rajat Mohan said that recently, numerous cases have been scrutinised by the GST department where Indian companies provide ESOP, ESPP, or RSU through their overseas holding companies, and they are toggling with the idea of imposing GST on Indian counterparts for the import of services.

"The tax position has now been clarified, confirming that no GST will be chargeable on transactions between the domestic company and its foreign subsidiary, as there is no supply between the two. This clarification underscores the principle that GST is applicable only to actual supplies and not to internal arrangements within a corporate group," Mohan added.

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Published 28 June 2024, 08:49 IST

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