31.07.2023: Indian units of foreign companies face GST queries on ESOPs

GST authorities are raising inquiries in cases where shares of a foreign parent or holding company are being allotted to an Indian subsidiary’s staff under schemes like employee stock option plan (ESOP) and employee share purchase plan (ESPP).

Indian subsidiaries — largely in the technology sector where ESOP is a popular employee incentive — are facing this issue in GST audit. Separate inquiries are also being raised by authorities. According to tax experts and industry watchers, GST authorities in Karnataka were the first to raise this issue and officials in other states have followed suit. 

The stand adopted by GST authorities is that the overseas entity, whose shares are allotted to the employees of the subsidiary company, is not the employer. The obligation of providing shares under the employment contract rests with the Indian subsidiary, but in turn is fulfilled by the overseas entity. Thus, it is an import of service by the Indian entity/ subsidiary, which is subject to 18% GST.

Typically notices by GST authorities state: This promise or assurance which is in the nature of incentive to the employees is made by ABC India. However, this financial service has been fulfilled by ABC International. The import of financial service has been done by ABC India to keep up its obligation or assurance made to its employees. Hence this ‘financial service’ comes under ‘HSN code 9971’ which is subject to tax under reverse charge at the hands of ABC India.

Indian subsidiaries are at various stages of litigation. Some have replied to the show-cause notices, whereas in other cases, the matter has moved forward and appeals have been filed with the GST Commissioner (Appeals).

All hopes are pinned on the forthcoming GST council meeting, which in July had put to rest another issue plaguing Indian subsidiaries. It had clarified that the ‘activity of holding shares of a subsidiary company by a holding company' will not be treated as a supply of service and hence no GST will apply.

Source: The Times of India 

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