GST applicability of ESOP/ESPP/RSU provided by a company to its employees or through its overseas holding company

Introduction to ESOP/ESPP/RSU:

An Employee Stock Option Plan (ESOP) is a program that gives employees the opportunity to buy shares of their company’s stock at a predetermined price, usually lower than the market value. This plan is often used as part of an employee’s compensation package and serves as a tool for motivating and retaining employees by making them partial owners of the company. By aligning the interests of employees with those of the company, ESOPs encourage employees to work towards the company’s success, as their personal financial gains are tied to the company’s performance.

Purpose of Share Allotment:

• • Companies offer shares or securities to their employees as a form of incentivization. This strategy is used to motivate employees by making them stakeholders in the company’s success.

Types of Plans:

• • These shares or securities are provided under specific plans, which can include:

1. Employee Stock Purchase Plan (ESPP)

2. Employee Stock Option Plan (ESOP)

3. Restricted Stock Unit (RSU)

Terminology:

• • The specific term used (ESPP, ESOP, or RSU) depends on the compensation agreement between the employer and the employee.

ESPPs and ESOPs:

• • These plans are generally referred to as ‘options.’ Employees have the option to buy shares at a predetermined price (often lower than market value) within a specific timeframe.

RSUs:

• • RSUs are typically given as awards or rewards. They are contingent upon the employee meeting certain performance standards or staying with the company for a specific period.

Common Objective:

• • Despite the different names and structures, the fundamental goal of all these plans is the same: to allocate shares or securities to employees as part of their compensation package.

Motivation and Performance:

• • The ultimate aim is to align the employees’ interests with the company’s goals, thereby motivating them to perform better by giving them a stake in the company’s success.

Context of ESOP/ESPP/RSU in Indian Companies:

Foreign Parent Company Involvement:

Some Indian companies offer their employees shares or securities or sometime they offer their employees shares or securities of their foreign parent company as part of their compensation package. This is done through ESOP, ESPP, or RSU plans.

The Process:

• • Step 1: The Indian subsidiary offers the option to its employees to receive shares/securities as part of their compensation.
  • Step 2: Employees decide to exercise this option by either buying shares at a set price or waiting until they “vest” (become available to them).
  • Step 3: The foreign parent company issues these shares/securities to the employees.
  • Step 4: The Indian subsidiary reimburses the foreign parent company for the cost of these shares, usually at their market value.

Key Clarifications under GST (Goods and Services Tax):

Shares and Securities:

• • 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. As a result, the buying or selling of these shares is not subject to GST.

Employee Compensation:

• • 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.

Reimbursement:

• • When the Indian subsidiary reimburses the foreign parent company for the cost of shares, this is seen as a repayment rather than a purchase of goods or services. Therefore, no GST is applicable on this reimbursement.

Exceptions:

Additional Charges:

• • If the foreign parent company charges an additional fee, markup, or commission over the cost of the shares, this extra amount is considered as payment for a financial service. In such cases, GST would be applicable on this additional fee.
  • The Indian subsidiary would be required to pay GST under the reverse charge mechanism (where the buyer pays the tax instead of the seller).

Conclusion:

General Rule:

• • Generally, no GST is applicable on the transfer of shares or the reimbursement for their cost between the Indian subsidiary and the foreign parent company.

Exception to the Rule:

• • If there is any extra charge above the cost of shares, GST would be applicable on that additional amount.