ESOPs have been used by companies, both in India and internationally, to retain, attract, and motivate employees, and to create wealth for them, thereby aligning their interests with the company’s. Nowadays, many MNCs grant ESOPs to employees of their Indian subsidiaries or holding companies, whether based in India or outside India.
There has been an ambiguity on “whether the transactions done by the Indian subsidiaries wherein they reimburse the value of the shares so issued to the employees by the foreign holding companies is liable to GST in India.”
Concerning the above query, the Central Board of Indirect Taxes and customs has issued a circular dated 26th June 2024, providing clarity on the taxability of ESOP”s ESPS’s and RSU’s.
The circular clearly states as follows:
- There is no service being provided by the employees in India to the Holding company except that they are in employment with the Indian subsidiary and have rendered their services in India.
- The domestic subsidiary company gives options. Facility of ESOP /ESPS/RSU to its employees as a part of compensation package as per terms of employment. GST is not levied on the compensation paid, as per the terms of employment, and ESOPs are offered as a part of compensation and issuance of shares are therefore exempt from GST.
- Purchase or sale of securities /shares in itself is neither a supply of goods nor a supply of service. Therefore, in the absence of such transaction, falling under the supply of goods or services as per GST Act, GST is not leviable on said transaction of sale/purchase/transfer of securities/shares.
- Exercising the option by the employee of Indian subsidiary Company, the securities/shares of foreign holding company are allotted directly by the holding company to the concerned employees of Indian subsidiary company, and the cost of such securities/shares is generally reimbursed by the subsidiary company to the holding company is neither goods nor services under GST, thus there is no GST payable in respect of cost reimbursement by Indian Subsidiary.
Thus, the transaction shall be considered as simply reimbursement of the Cost of ESOP’s as per the terms of accounting and not liable to the Charge of GST in India.
For more clarity on the above aspects, the same can be referred in the circular.
Sources: Circular No. 213/07/2024-GST issued by Central Board of Indirect Taxes and Customs dated 26th June 2024.
