Indian Subsidiaries of Foreign Companies Face GST Queries on ESOPS

Jul31,2023 #ESOP #ESPP #GST
GST Law Insider
GST Law Insider

LI Network

Published on: 31 July 2023 at 14:15 IST

GST authorities in India have initiated inquiries into cases where shares of a foreign parent or holding company are allocated to employees of Indian subsidiaries through schemes like Employee Stock Option Plan (ESOP) and Employee Share Purchase Plan (ESPP).

The technology sector, where ESOPs are commonly used as employee incentives, is particularly affected, with Indian subsidiaries facing scrutiny during GST audits.

The issue was first raised by GST authorities in Karnataka, and similar inquiries have followed in other states.

The GST authorities argue that the overseas entity, whose shares are allocated to the employees of the Indian subsidiary, is not the employer. Instead, the responsibility for providing shares under the employment contract lies with the Indian subsidiary.

As a result, the transaction is considered an “import of service” by the Indian entity, making it subject to 18% GST.

Tax experts, however, assert that ESOP is part of an employee’s salary and should be outside the purview of GST. Employees participating in ESOP plans already pay income tax on the same.

Tax experts from various firms suggest that an exception should be made to exclude ESOP from being treated as an import of service.

Alternatively, they propose clarifying that ESOPs are in the nature of securities, falling outside the ambit of GST.

Some Indian subsidiaries are currently entangled in litigation related to this issue.

While some have responded to show-cause notices, others have progressed to filing appeals with the GST Commissioner (Appeals).

The matter remains under discussion, and stakeholders are eagerly anticipating the forthcoming GST council meeting for possible resolutions and clarifications.

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