Representation highlighting issues in relation to TCS on remittances made for employee stock purchase plans of overseas group companies

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Representation highlighting issues in relation to TCS on remittances made for employee stock purchase plans of overseas group companies

Tejasvi

@tejasvi

June 28, 2023

Public Policy

3983

We have made a submission to Ministry of Finance (MoF) to highlight difficulties being faced by the Industry in complying with Tax Collection at Source (TCS) provisions under S. 206C(1G) of Income Tax Act, 1961 (IT Act) with respect to remittances made by employees towards Employee Stock Option Plan (ESOP)/ Employee Stock Purchase Plan (ESPP) under Liberalised Remittance Scheme (LRS).

As per Master Direction on Liberalised Remittance Scheme (LRS regulations) prescribed by the Reserve Bank of India (RBI), resident individuals are allowed to freely remit up to USD 2,50,000 in a financial year outside India for any permissible current or capital account transaction or a combination of both.

MoF amended S. 206C(1G) of IT Act to increase the TCS rate on any remittance under LRS scheme to 20% w.e.f. July 1, 2023.2 Earlier, the rate of TCS on foreign outward remittances under LRS in excess of INR 7 lakhs was 5%.

The RBI, in August 2022, amended the LRS regulations to align it with the provisions prescribed in Foreign Exchange Management (Overseas Investment) Rules, 2022 (OI Rules). As per amended LRS regulations, permissible capital account transactions by an individual include "acquisition of immovable property abroad, Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI), in accordance with the provisions contained in Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022 and Foreign Exchange Management (Overseas Investment) Directions, 2022”.

Accordingly, acquisition of less than 10% shares by employees and directors of Indian subsidiary under ESOP/ ESPP offered by a foreign group entity are considered as overseas portfolio investment under the OI Rules and hence, covered within the ambit of LRS.

As a result, employees participating in ESOP/ ESPP scheme will get impacted as TCS @ 20% will be collected by the AD bankers from employee’s post-tax salary over and above the ESPP contribution w.e.f July 1, 2023. This will significantly impact cash flow for employees since they will be able to claim a refund of TCS only after filing the return of income (i.e., around July of the next financial year) in case they do not have any other income against which TCS can be adjusted. This will also substantially increase compliance burden for employers as generally, Indian employers deduct the amount to be remitted towards purchase of ESOP/ ESPP from employees’ salary and facilitate in completing the documentation for remittance of such funds by employees. Further, the objective behind introducing TCS provisions on LRS, as explained in Memorandum to Finance Bill 2020, was to widen and deepen the tax net. In case of salaried class persons, majority of

the taxpayers are already paying full amount of taxes by way of withholding tax mechanism. The finance minister in budget speech for the year 2018-19 also mentioned that “income tax data analysis suggests that major portion of personal income-tax collection comes from the salaried class.” Accordingly, collecting TCS on ESOP/ ESPP from salaried persons who are already paying taxes by way of withholding tax on salary income might not be the intention of law.

We have requested MoF to:

Exclude remittances made for acquisition of shares under ESOP/ ESPP scheme from the applicability of TCS. Alternatively, similar to payments by an individual using international debit or credit cards, threshold of INR 7 lacs may be introduced in relation to remittances made towards ESOP/ ESPP purchases.
Further, in case TCS is applicable, Government should allow credit of TCS paid while computing the amount of TDS to be deducted on salary income of the employees. This will help in avoiding cash flow issues for employees.

These measures will facilitate ease of doing business in India.

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Tejasvi