In a move poised to significantly benefit multinational corporations like Google, Microsoft, Oracle, and Walmart, the Indian government has announced that Employee Stock Option Plans (ESOPs), Employee Stock Purchase Plans (ESPPs), and Restricted Stock Units (RSUs) provided by foreign firms to their employees in India will not attract Goods and Services Tax (GST), subject to certain conditions.
This regulatory shift addresses a longstanding issue where many MNCs and start-ups were entangled in legal battles over the taxability of these stock options. The GST Council’s recommendations have led the Central Board of Indirect Taxes & Customs (CBIC) to issue a detailed circular, elucidating the new provisions.
The CBIC’s circular clarifies that no supply of service is deemed to occur between the foreign holding company and the domestic subsidiary when the foreign holding company issues ESOPs, ESPPs, or RSUs to the employees of the domestic subsidiary, provided the domestic subsidiary reimburses the foreign holding company on a cost-to-cost basis. However, if the foreign holding company charges an additional amount beyond the cost of the securities/shares, GST will be levied on this excess amount, payable by the domestic subsidiary on a reverse charge basis.
This development is expected to end the disputes between the tax authorities and Indian subsidiaries of global firms. Ankit Joshi, Associate Partner at N.A. Shah Associates, noted that tax departments at both central and state levels had been issuing notices to Indian entities, demanding GST on the reimbursement of share costs to the foreign head office under the reverse charge mechanism. The new circular brings much-needed clarity and a favorable impact for MNCs and their Indian subsidiaries.
Brijesh Kothary, Partner at Khaitan & Co, highlighted that the circular confirms the Indian subsidiary’s obligation under employment contracts to provide shares to employees, classifying the transaction as a transfer of securities, which is neither a supply of goods nor a supply of services under GST laws, thus exempt from GST.
This clarification is expected to provide relief to companies that have been issued notices or have paid taxes during investigations, enabling them to seek relief by citing the circular.