As multinational organizations expand their global talent pool, Employee Stock Option Plans (ESOPs) have emerged as a key incentive mechanism—particularly where a foreign parent entity extends equity-linked benefits to employees of its Indian subsidiary. This model, while popular, raises important accounting, indirect tax (GST), and transfer pricing considerations that companies must navigate to ensure full compliance.
GST Clarification on Cross-Border ESOPs:
(As per CBIC Circular No. 213/07/2024-GST)
The Central Board of Indirect Taxes and Customs (CBIC) has clarified the GST position where a foreign parent issues equity instruments (e.g., shares, stock options, RSUs) to employees of its Indian subsidiary.
Key Takeaways:
- Securities Are Not Taxable Under GST:
Equity instruments are not classified as ‘goods’ or ‘services’ under GST laws. Therefore, the mere issuance or transfer of such instruments is outside the scope of GST. - Employee Compensation Is Not a Supply:
Where ESOPs are part of employee remuneration, they fall under the employer-employee relationship and are explicitly excluded from GST as per Schedule III of the CGST Act.
GST on Reimbursements by Indian Subsidiaries
The GST applicability arises when the Indian entity reimburses the foreign parent for the cost of equity instruments. The treatment depends on the nature of the reimbursement:
- Cost-Only Reimbursements (No GST):
If the reimbursement is limited to the actual cost incurred—without any markup, commission, or service component—it is not treated as a supply of service. Hence, GST is not applicable. - Reimbursements with Mark-up/Service Fee (GST Applicable):
If additional amounts are charged (e.g., facilitation or administrative fees), it is treated as a taxable service.- GST must be paid by the Indian company under the Reverse Charge Mechanism (RCM).
- GST applies only on the service portion, not on the value of securities.
Conclusion:
The CBIC circular provides valuable clarity on GST treatment of cross-border ESOP reimbursements. However, companies must also pay attention to transfer pricing requirements, which continue to apply independently under direct tax laws.
Proper inter-departmental coordination—between HR, finance, tax, and legal teams—is essential to maintain compliance across jurisdictions and prevent exposure to regulatory risk.
