Seeking clarity on taxability of re-imbursement of securities/shares as SOP/ESPP/RSU provided by a company to its employees.

Circular No.: 213/07/2024-GST
Date of Circular: 26th June 2024
Relevant Sections and Rules:

• CGST Act, 2017:
  • Section 2(52) and Section 2(102): Definitions of “goods” and “services” (excluding securities)
  • Schedule III, Entry 1: Employee-employer services not treated as supply
  • Section 168(1): Power to issue instructions
• Securities Contracts (Regulation) Act, 1956:
  • Section 2(h): Definition of “securities” (includes shares)

Summary of Clarification Provided:

1. Background – ESOP/ESPP/RSU Issued to Employees of Indian Subsidiary by Foreign Holding Company:
   Indian subsidiaries often include employee stock options (ESOPs), employee stock purchase plans (ESPPs), or restricted stock units (RSUs) from their foreign parent as part of the employee compensation package. Upon exercising such options:

• The foreign holding company issues shares to the employee.
• The Indian subsidiary reimburses the cost to the parent company, either through payment or equity accounting.

2. Nature of Transaction – Not Supply of Goods or Services:
   Since shares/securities are excluded from both “goods” and “services” under the CGST Act, their transfer does not constitute a supply. Therefore:

• The issue or transfer of shares from the foreign parent to employees is not subject to GST.
• The reimbursement of share cost by the Indian subsidiary to the parent company on cost-to-cost basis is not a supply of service and hence, not liable to GST.

3. Remuneration Aspect – Covered Under Employer-Employee Relationship:
   The provision of ESOP/ESPP/RSU to employees is a part of their remuneration. As per Schedule III, Entry 1, any service by an employee to the employer in the course of employment is neither a supply of goods nor services. Thus, no GST applies on this portion of the compensation package.
4. Exception – Additional Charges Beyond Share Value Attract GST:
   If the foreign parent company charges any fee, markup, or commission beyond the actual cost of shares to the Indian subsidiary, then:

• This is considered as consideration for facilitation services, and
• GST is payable by the Indian subsidiary under reverse charge mechanism (RCM) on the additional amount only.

5. Final Clarification:

• No GST is payable on cost-to-cost reimbursement of ESOP/ESPP/RSU allotments.
• GST is payable under RCM only on any additional amount charged by the foreign parent company.

Source: Circular No.: 213/07/2024-GST