GST: REPRESENTATION ON EMERGING ISSUES: REIMBURSEMENT OF ESOP PROVIDED BY PARENT COMPANY CLASSIFIED AS IMPORT OF SERVICE

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GST: REPRESENTATION ON EMERGING ISSUES: REIMBURSEMENT OF ESOP PROVIDED BY PARENT COMPANY CLASSIFIED AS IMPORT OF SERVICE

Tejasvi

@tejasvi

May 27, 2022

Public Policy

1855

The term employee stock option (ESO) refers to a type of equity compensation granted by companies to their employees and executives. The company gives derivative options on the stock in the form of regular call options and give the employee a right to buy company's stock at a specified price for a finite period of time.

ESOP is particularly popular with startups, whereby they tend to motivate the employees and give them a sense of ownership in the company. Further, this option is also popular with listed companies and counterpart of foreign companies in India, whereby they provide employees stock of foreign companies that are listed on stock exchanges.When shares are allotted by foreign counterpart to employees of Indian subsidiary, it reimburses the actual amount of expense incurred towards stock-based expense in connection with equity granted to the employees.

Issue

Revenue authorities have started alleging that in the aforesaid scenario, as the obligation of providing shares as per the employment contract rests with the Indian company which is in turn is fulfilled by foreign counterpart, it qualifies to be import of financial service from foreign counterpart.

The said compensation is being provided under the employment contract for services rendered by employees, which does not qualify as supply in terms of S. No. 1 of Schedule III of CGST Act.

It is important to note that the transaction is nothing, but mere recovery of expense incurred by foreign counterpart for issuing shares to employees of its Indian subsidiary and supply is being provided by parent company. On the other hand, foreign counterparty reimburses the Tax Deducted at Source (TDS) amount payable by Indian company on value of ESO being taxed as perquisites in the hand of the employee.

Reference is also made to definition of “goods” and “services” in terms of S. 2(52) & 102 of CGST Act which specifically excludes securities from the definition. Hence, supply of same cannot be made liable to GST.

Securities Contract Regulation Act, 1957 defines securities as shares of any body corporate and the term ‘body corporate’ has been defined in Companies Act, 2013 to include shares of companies formed overseas. Hence, shares of foreign company qualify as securities for the purpose of GST and supply of same should not be held to be supply in terms of GST law. The said interpretation leads to a scenario whereby a company has to pay GST on the expense incurred towards payment of compensation towards services incurred by employees

Recommendation

In this regard, we have made a submission to GST officials on May 26, 2022 requesting them to clarify that mere reimbursement of expense carried out by Indian counterpart for issuance of shares to its employees will not be considered as facilitating of financial services by foreign entity to its Indian counterpart.

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Tejasvi

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