Circular No.: 213/07/2024-GST
Date: 26th June, 2024
Subject: Clarification on the taxability of ESOP/ESPP/RSU provided by a company to its employees through its overseas holding company
Key Points and Clarifications:
Background:
This circular addresses the taxability of Employee Stock Option Plans (ESOPs), Employee Stock Purchase Plans (ESPPs), and Restricted Stock Units (RSUs) provided by an Indian company to its employees through its overseas holding company. It aims to provide clarity on whether such transactions are liable to GST and under what conditions.
Key Provisions Involved:
- Section 2(52) of the CGST Act, 2017: Defines “goods”.
- Section 2(102) of the CGST Act, 2017: Defines “services”.
- Schedule III of the CGST Act, 2017: Specifies activities or transactions which shall be treated neither as a supply of goods nor a supply of services.
- Section 168(1) of the CGST Act, 2017: Empowers the Board to issue instructions and directions to GST officers to ensure uniformity in the implementation of the Act.
Issues and Clarifications:
Issue 1: Taxability of Transfer of Shares/Securities by Foreign Holding Company to Employees of Indian Subsidiary
- Concern: Whether the transfer of shares/securities by a foreign holding company directly to the employees of its Indian subsidiary, and the subsequent reimbursement of the cost by the Indian subsidiary to the foreign holding company, is considered an import of financial services liable to GST.
- Clarification:
- The transfer of shares/securities is not considered a supply of goods or services under the CGST Act. Securities, including shares, are excluded from the definitions of goods and services.
- Such transactions are part of the employee’s compensation and are neither goods nor services.
- Therefore, the reimbursement of costs for these shares/securities by the Indian subsidiary to the foreign holding company does not attract GST.
Issue 2: GST on Additional Fees, Markup, or Commission Charged by Foreign Holding Company
- Concern: Whether any additional fee, markup, or commission charged by the foreign holding company to the Indian subsidiary for issuing ESOP/ESPP/RSU is liable to GST.
- Clarification:
- If the foreign holding company charges any additional fee, markup, or commission for facilitating/arranging the transaction, it is considered a supply of services.
- The Indian subsidiary is liable to pay GST on such amounts under the reverse charge mechanism (RCM).
- This ensures that any value-added services provided by the foreign holding company are taxed appropriately.
Key Points from Circular:
- Nature of ESOP/ESPP/RSU Transactions:
- ESOPs, ESPPs, and RSUs are part of employee compensation plans and are aimed at motivating and retaining employees.
- The issuance of these securities/shares by the foreign holding company to the employees of the Indian subsidiary is not considered a supply of goods or services.
- No GST on Transfer of Securities:
- The transfer of securities/shares is excluded from the definitions of goods and services under the CGST Act.
- Reimbursement of costs by the Indian subsidiary to the foreign holding company for these shares is not considered a taxable supply.
- GST on Facilitation Services:
- If the foreign holding company charges an additional fee, markup, or commission for issuing the shares/securities, it is considered a supply of services.
- The Indian subsidiary must pay GST on such charges under the RCM.
Tabular Summary
| Issue | Clarification |
|---|---|
| Taxability of transfer of shares/securities by foreign holding company to employees of Indian subsidiary | Transfer of shares/securities not liable to GST as they are neither goods nor services. |
| GST on additional fees, markup, or commission charged by foreign holding company | Additional fee, markup, or commission by foreign holding company to Indian subsidiary liable to GST on reverse charge basis. |