Thinking about getting stock options as part of your compensation package? If you work for an Indian subsidiary of a foreign company, there’s good news! The government has clarified that taxes won’t be charged on these stock options, as long as certain conditions are met.
“These plans are designed to align employee interests with the company’s long-term performance, fostering a sense of ownership and motivation among employees. For MNCs, equity shares issued are from the foreign parent company, allowing employees to acquire shares of the foreign holding company upon meeting specified conditions,” said Experts
The Indian subsidiaries reimburse their foreign holding companies for the value of these shares issued to employees. There has been uncertainty about whether this transaction and the subsequent payment by the subsidiaries would be subject to GST.
Addressing this ambiguity, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular providing much-needed clarity on the taxability under GST for ESOPs, ESPPs, and RSUs.
The Circular explicitly states that the issuance of shares to employees is considered part of their compensation package, which is outlined in their terms of employment. Since GST is not levied on the compensation paid to employees for their services, the issuance of shares under ESOPs and RSUs is also exempt from GST.
The Circular further clarifies that the reimbursement of the value of shares by the Indian subsidiaries to their foreign holding companies does not attract GST. This is because equity shares are considered neither goods nor services under the GST law. Therefore, the reimbursement transaction falls outside the scope of GST, ensuring that no tax is payable on this aspect of the transaction.
Additionally, the Circular clarifies that the Indian subsidiary’s reimbursement of the share value to the foreign holding company does not attract GST. Equity shares fall outside the scope of GST, and therefore, no GST is payable on this reimbursement.
Simplified: Normally, when a company buys something (like goods or services) from another company, a tax called GST applies. But in this case, the Indian subsidiary company isn’t really “buying” anything from the foreign holding company. They’re simply reimbursing the cost of the stock options, which are like vouchers to buy shares at a specific price. Since it’s just a cost recovery, it’s not considered a taxable service.
When Things Get Taxed (GST): Imagine the foreign company adds an extra fee on top of the stock option cost. This fee might be for administrative work or something else. Now, this additional fee becomes a service provided by the foreign company to the Indian subsidiary. Since it’s a service, it falls under the GST rules.
Who Pays the Tax (GST): If there’s an extra fee, the Indian subsidiary company has to pay the GST on that amount. It’s like they’re “importing” a service from the foreign company, so they’re responsible for the tax.
Example
Consider the case of ABC Corp, a multinational company based in the USA, and its Indian subsidiary, ABC India Pvt Ltd. ABC India offers Employee Stock Option Plans (ESOPs) to its employees, including Ravi, as part of their compensation packages. Ravi becomes eligible to receive shares of ABC Corp after meeting specific conditions outlined in his employment contract. Once Ravi meets these conditions and exercises his ESOPs, ABC Corp issues shares worth $5,000 directly to him. Subsequently, ABC India reimburses ABC Corp for the value of these shares, paying the equivalent $5,000.
The Circular clarifies that the issuance of shares worth $5,000 to employees like Ravi is part of their compensation package, which falls under their terms of employment. As GST is not levied on employee compensation, the issuance of shares through ESOPs is exempt from GST. Hence, Ravi is not liable to pay any GST on the shares received by him.
Furthermore, the Circular states that the reimbursement of the share value of $5,000 by ABC India to ABC Corp is not considered a supply of goods or services under GST law, meaning that no GST is applicable to this reimbursement either. So, the repayment of the value of shares of Rs 5000 would not be charged to GST either.
However, the circular also clarifies that if ABC Corp charges any additional fee, markup, or commission for issuing the shares, such as a $500 administrative fee, this would be considered a supply of services. In this case, GST would be applicable on the additional $500 fee. ABC India would be required to pay GST on this $500 on a reverse charge basis.
In short:Â
Regular stock option cost (market value) – No GST
Extra fees charged by foreign company – GST applies on those fees (paid by Indian subsidiary)
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