issued by CBIC Circular No. 213/07/2024- GST on June 26, 2024Employee Stock Option Plans (ESOPs), Employee Stock Purchase Plans (ESPPs), and the tax implications of Restricted Stock Units (RSUs) issued by companies to employees through foreign holding entities.
Background and context
In recent years, Indian companies have increasingly included options for employees to receive shares or securities of their foreign holding companies as part of their compensation packages. This practice is designed to align employee interests with the long-term success of the company, encouraging better performance and ensuring retention.
Under these arrangements, when employees of Indian subsidiaries exercise their stock options, the foreign holding company directly allocates their shares. Subsequently, the Indian subsidiary paid the price of these shares to the holding company.
While this method of compensation is beneficial to both employees and employers, it has raised questions about the applicability of GST on such transactions, requiring clarification from the authorities.
Explanation sought: Will the subsequent reimbursement of the cost of these shares/securities by the Indian subsidiary company to the foreign holding company be treated as import of services and attract GST under RCM?
Let us evaluate through a legal lens:
Definition of Securities under GST Act:
- Securities including shares are not classified as goods or services as per Section (52) and Section (102) of Section 2 of the CGST Act.
- The term “securities” as defined under clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956, includes shares.
Therefore, while assessing the taxability of shares or securities allotted to employees by the foreign holding company and subsequent reimbursement by the Indian subsidiary, it is clear that these transactions fall outside the purview of GST. As such, GST is not applicable on 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 their employment or in connection therewith are not considered to be the supply of goods or services. {Ref – Entry 1 of Third Schedule to CGST Act}.
Therefore, GST is not applicable on compensation paid by an employer to an employee under the terms of the employment contract. This includes transactions involving the transfer of securities or shares from a foreign holding company to employees of its domestic subsidiary.
Clarification of CBIC
CBIC has clarified that transfer of shares/securities by a foreign holding company to employees of its domestic subsidiary, paid on cost-to-cost basis, is not subject to GST as it is not a supply of goods or services. However, if the foreign holding company charges any additional fee, markup, or commission, it is treated as a supply of services and GST is applicable on that additional amount, payable by the domestic subsidiary on a reverse charge basis.
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