The CBIC issued Circular No. 213/07/2024-GST on June 26, 2024, concerning the taxation of Employee Stock Option Plans (ESOP), Employee Stock Purchase Plans (ESPP), and Restricted Stock Units (RSU) granted by companies through their foreign holding entities to employees.
Background and Context
In recent years, Indian companies have increasingly included the option for employees to receive shares or securities of their foreign holding company as part of their compensation packages. This practice is designed to align employees’ interests with the company’s long-term success, incentivizing better performance and ensuring retention.
Under these arrangements, when employees of the Indian subsidiary exercise their stock options, the foreign holding company directly allots the shares to them. Subsequently, the Indian subsidiary reimburses the cost of these shares to the holding company.
While this method of compensation is beneficial for both employees and employers, it has raised questions regarding the applicability of GST on such transactions, necessitating clarification from the authorities.
Clarifications Sought: Is the subsequent reimbursement of the cost of these shares/securities by the Indian subsidiary company to the foreign holding company be considered an import of services and attracts GST under RCM?
Let us evaluate through legal lenses:
Securities Definition under GST Law:
- Securities, including shares, are classified neither as goods nor services according to clause (52) and clause (102) of section 2 of the CGST Act, respectively.
- The term “securities” is defined under clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956, which includes shares.
Therefore, when evaluating the taxability of shares or securities allotted to employees by the foreign holding company and the subsequent reimbursement by the Indian subsidiary, it is clear that these transactions fall outside the purview of GST. As such, GST is not applicable to these transactions of sale/purchase/transfer of securities/shares.
Employee Services and GST:
Services rendered by an employee to their employer in the course of or in relation to their employment are considered neither as a supply of goods nor a supply of services. { Ref – Entry 1 of Schedule III of the CGST Act}.
Therefore, GST is not applicable to the compensation paid to an employee by the employer under the terms of the employment contract. This includes transactions involving the transfer of securities or shares from a foreign holding company to the employees of its domestic subsidiary.
CBIC’s Clarification
The CBIC clarified that the transfer of shares/securities by a foreign holding company to employees of its domestic subsidiary, reimbursed on a cost-to-cost basis, is not subject to GST as it is neither a supply of goods nor services. However, if the foreign holding company charges any additional fee, markup, or commission, it is considered a supply of services, and GST will be applicable on that additional amount, payable by the domestic subsidiary on a reverse charge basis.
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