Indian units of foreign cos under GST scanner over ESOPs
July 31, 2023
Synopsis
Indian subsidiaries of foreign companies, particularly in the technology sector, are facing GST scrutiny over issues with employee stock option plans (ESOP) and employee share purchase plans. Authorities are reportedly demanding the 18% service tax as the obligation lies with the Indian subsidiary to provide shares under an employment contract.
In cases where foreign parent or holding companies are allotting its shares their Indian subsidiary’s staff under schemes like employee stock option plan (ESOP) and employee share purchase plan (ESPP), the Goods and Services Tax (GST) authorities are raising inquiries, TOI reported.
ESOP is a well-known employee incentive in technology sector and Indian subsidiaries mostly in this sector are facing this issue in GST audit. The authorities are also raising separate inquiries pertaining to the said issue.
GST authorities in Karnataka were the first to raise this issue and officials in other states have followed suit, according to tax experts and industry watchers.
The argument by GST authorities is that the obligation remains with the Indian subsidiary to provide shares under the employment contract and not the overseas entity as it is not the employer. Thus, it is an import of service by the Indian entity/subsidiary, which is subject to 18% GST.
ESOP is a part of salary and is outside the ambit of GST, said tax experts who are attached to a few companies. However, employees who are covered by ESOP plans pay income tax on the same.
“Technically, there is no underlying supply. The recovery of ESOP cost by the overseas entity from the Indian subsidiary is more from the accounting treatment standpoint and the underlying transaction is only that of employer vs employee. There cannot be any supply attributed to such transactions,” Pratik Jain, partner at PwC, said to TOI.
GST authorities are demanding the tax when such amount is cross-charged from the overseas company to the Indian entity, according to Jain.
“Under GST law for import of service from related parties, a tax liability arises when such amount is accrued in the books of accounts of Indian entities or paid, whichever is earlier,” he added.
While some have replied to the show-cause notices, in other cases, the matter has moved forward and appeals have been filed with the GST Commissioner (Appeals), thus leaving Indian subsidiaries at various stages of litigation.
An exception should be created where the ESOP arrangement is not treated an import of service, but a mere reimbursement mechanism, Jain said. Meanwhile, it could be clarified that ESOPs are in nature of securities which are outside the ambit of GST.
All hopes are pinned on the forthcoming GST council meeting on August 2, 2023.
[The Economic Times]
