In a landmark decision poised to benefit major technology giants like Google, Microsoft, Oracle, and Walmart, along with a myriad of other multinational corporations (MNCs), the Indian government has announced that Employee Stock Option Plans (ESOPs), Employee Stock Purchase Plans (ESPPs), and Restricted Stock Units (RSUs) offered by foreign firms to their employees in India will be exempt from Goods and Services Tax (GST). This development, subject to specific conditions, marks a significant relief for numerous MNCs and start-ups entangled in tax disputes over these employee benefits.
The Central Board of Indirect Taxes & Customs (CBIC), following recommendations from the GST Council, has issued a comprehensive circular clarifying this stance. The circular unequivocally states that no service supply is perceived between the foreign parent company and its Indian subsidiary when the parent issues ESOPs, ESPPs, or RSUs to the subsidiary’s employees, provided the cost is reimbursed on a cost-to-cost basis.
However, the CBIC has stipulated that if any additional charge is levied over and above the cost of the securities or shares, GST will be applicable on that excess amount. In such cases, the domestic subsidiary will be liable to pay GST on a reverse charge basis for the imported service.
This circular elucidates the multifaceted process of transferring ESOPs, ESPPs, and RSUs, emphasizing that these transactions involve several steps. The domestic subsidiary offers these stock options as part of the employees’ compensation package, aligning with employment terms. Employees may then exercise these options by purchasing shares at the grant price or holding onto them until they vest.
This clarity aims to resolve longstanding disputes between the tax authorities and Indian subsidiaries of MNCs. Experts like Ankit Joshi, Associate Partner at N.A. Shah Associates, and Brijesh Kothary, Partner at Khaitan & Co, believe this directive will significantly impact by offering a clear framework and relieving companies from potential tax liabilities on these transactions.
Joshi notes that the tax authorities at both central and state levels had previously issued GST demands on the cost reimbursements under the reverse charge mechanism (RCM). The new circular, however, sets a precedent that could end these disputes, providing much-needed relief and clarity.
Kothary adds that this guideline applies not only to arrangements between foreign and Indian subsidiaries but may also extend to domestic parent-subsidiary relationships. Companies that have faced tax demands or have already paid taxes during investigations might consider seeking redress based on this circular.