CBIC Circular No. 213/7/2024-GST, issued on 26 June 2024 under F. No. CBIC-20001/4/2024-GST, resolves a significant compliance uncertainty for Indian subsidiaries of multinational companies: GST does not apply to ESOP/ESPP/RSU share transfers from a foreign holding company on a cost-to-cost basis. GST arises under reverse charge mechanism (RCM) on Section 9(4) of the Central Goods and Services Tax Act, 2017 (CGST Act) only if the foreign holding company charges an additional fee or markup beyond the actual cost of the shares.
Background: Why Field Formations Were Demanding RCM
Employee stock ownership plans — whether structured as Employee Stock Option Plans (ESOPs), Employee Stock Purchase Plans (ESPPs), or Restricted Stock Units (RSUs) — are standard components of compensation packages in multinational corporations operating in India. In a typical structure, the Indian subsidiary offers employees the option to receive shares in the foreign parent or holding company listed on an overseas exchange. When employees exercise their options, the foreign holding company transfers shares directly to the employees, and the Indian subsidiary reimburses the cost to the foreign holding company.
The compliance confusion arose because some Central Tax field formations concluded that this reimbursement constituted an import of financial services by the Indian subsidiary from the foreign holding company — bringing it within the reverse charge framework under the CGST Act and the Integrated Goods and Services Tax Act, 2017. Industry and trade associations made representations to the CBIC pointing out that this interpretation was incorrect and generated disproportionate compliance burden for MNCs with large Indian employee bases. Circular 213/2024 is CBIC's response, issued under the Board's authority under Section 168(1) of the CGST Act to ensure uniformity across all field formations.
How the Circular Draws the Line
Securities fall entirely outside GST
The starting point of the CBIC's analysis is the definitional architecture of the CGST Act. Section 2(52) defines "goods" as every kind of movable property other than money and securities. Section 2(102) defines "services" as anything other than goods, money, and securities. Shares qualify as "securities" under clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956. The combined effect: shares sit outside both the goods definition and the services definition. The transfer of ESOP/ESPP/RSU shares by a foreign holding company is, at its core, a transfer of securities — and GST simply has no reach over it.
Compensation under employment contract: Schedule III Entry 1
CBIC's second line of reasoning draws on Schedule III Entry 1 of the CGST Act, which excludes from the scope of supply all services provided by an employee to the employer in the course of or in relation to employment. ESOP/ESPP/RSU programmes are part of the employment compensation package — they are structured to motivate performance and align employee interests with the company. Regardless of whether the scheme is an option (ESOP/ESPP) or a performance-contingent award (RSU), the underlying character is employer-to-employee compensation under the employment contract. GST does not apply to such compensation, whether paid in cash or in the form of shares.
Cost-to-cost reimbursement: not an import of services
Even accepting that two entities are involved (the Indian subsidiary and the foreign holding company), CBIC holds that the reimbursement flowing from the Indian subsidiary to the foreign holding company is payment for securities — not for services. Because the underlying transaction involves securities (outside GST), the reimbursement for that transaction cannot be recharacterised as an import of services. No GST arises on a cost-to-cost reimbursement where the amount equals the market value of the shares at the date of allotment.
The carve-out: additional markup triggers RCM
The circular draws a precise line. If the foreign holding company charges any amount over and above the cost of the shares — described as an administration fee, management fee, commission, or by any other name — that surplus is consideration for a distinct service: facilitating or arranging the transaction in securities. That facilitation service is an import of services by the Indian subsidiary from the foreign holding company. GST is payable by the Indian subsidiary under reverse charge on that additional amount alone under Section 9(4) of the CGST Act.
Illustrative example:
- Shares allotted to employees, market value: ₹100 per share × 1,000 shares = ₹1,00,000
- Reimbursement to foreign holding company = ₹1,00,000 (cost-to-cost) → No GST
- Reimbursement = ₹1,05,000 (₹1,00,000 cost + ₹5,000 administration fee) → ₹5,000 attracts GST under RCM; applicable rate depends on classification of the facilitation service
Practitioner Implications
Audit your inter-company ESOP documentation. The first step for any Indian subsidiary in a multinational group is to review the inter-company agreement and cost-sharing arrangement with the foreign holding company. The critical question is whether any amount beyond the cost of shares is charged. Check invoices and debit notes received from the foreign holding company for any line item labelled as administration charge, platform fee, management charge, or similar.
Disaggregate bundled invoices. Where a single inter-company invoice covers both ESOP cost recovery and broader management or HR services, the amounts must be clearly disaggregated. Only the ESOP cost recovery portion is GST-exempt; the management services component remains subject to GST under the standard import-of-services framework and must be reported in GSTR-3B under reverse charge.
Update RCM registers and GSTR-3B. Indian subsidiaries that previously discharged RCM on cost-to-cost ESOP reimbursements based on field-level demand — and availed input tax credit against that liability — should assess whether prior periods require any correction in their GST returns. The circular represents a clarification of existing law rather than a prospective policy change.
Documentation for audit defence. Maintain contemporaneous records showing: (a) the number of shares allotted, the grant or vesting date, and the market value per share on that date; (b) the reimbursement amount and its reconciliation to the share cost; (c) the inter-company agreement; and (d) the foreign holding company's invoice or debit note. This documentation package is the primary defence in any scrutiny or audit proceeding.
Beyond this brief Preview Full verbatim text of Circular No. 213/7/2024-GST, clause-by-clause legal analysis, and RCM compliance checklist for cross-border ESOP structures are available on Veritect Legal Intelligence. Access Veritect →
Frequently Asked Questions
Q: Is GST applicable on ESOP/ESPP/RSU shares allotted by a foreign holding company to Indian subsidiary employees?
A: No. Under Circular No. 213/7/2024-GST, securities/shares are neither goods nor services under the CGST Act. Allotment of ESOP/ESPP/RSU shares is not a taxable supply. The employer-employee relationship is also outside the scope of GST under Schedule III Entry 1 of the CGST Act, since ESOP/ESPP/RSU is compensation paid by the employer to the employee under the terms of employment.
Q: Does the Indian subsidiary need to pay GST under RCM on reimbursement of ESOP costs to the foreign holding company?
A: Not on the cost-to-cost reimbursement — since the payment is for securities (neither goods nor services under §§2(52) and 2(102) of the CGST Act), it is not an import of services. However, if the foreign holding company charges any additional fee or markup beyond the cost of shares, that additional amount is treated as consideration for a facilitation service, and GST is payable under reverse charge mechanism by the Indian subsidiary under Section 9(4) of the CGST Act.
Q: How should Indian subsidiaries determine whether an additional fee is being charged by the foreign holding company?
A: Review the inter-company agreement and cost-sharing documentation. If the reimbursement amount exactly equals the market value of the shares at the time of transfer, it is cost-to-cost (no GST). If any surplus is charged — described as administration fee, management fee, commission, or by any other name — that surplus attracts GST under reverse charge under Section 9(4) of the CGST Act. The circular makes clear that the label given to the charge is irrelevant; what matters is whether any amount beyond the actual share cost is recovered.
Source Attribution
This article is based exclusively on CBIC Circular No. 213/7/2024-GST dated 26 June 2024 (F. No. CBIC-20001/4/2024-GST), issued by the GST Policy Wing of the Central Board of Indirect Taxes and Customs. The circular is available at the official CBIC Tax Information Portal. All analysis is original work by Veritect Legal Intelligence and does not constitute legal advice. Practitioners should verify the current status of any circular before relying on it for compliance decisions.
Primary source: CBIC Circular No. 213/7/2024-GST
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