Virtual Stock Options (VSOP), also known as Phantom Stocks, are given by Companies to incentivize and retain employees. VSOPs, are virtual shares that can be converted to a cash incentive by the employee based on the value of the physical share. Unlike Employee Stock Options (ESOPs), VSOPs do not involve the issuance of equity or actual shares by the company. Instead, it offers a way for individuals to benefit from the company's growth without acquiring ownership or receiving dividends.
In cases where shares of foreign parent or holding company are being allotted to an Indian subsidiaries employee under schemes like ESOPs and Employee Share Purchase Plan (ESPP), the stand of the GST Authorities is that the overseas entity is not the employer and therefore ESOPs/ VSOPs constitute an import of a taxable service by the Indian Subsidiary.
A typical VSOP Arrangement
VSOPs are essentially a part of the remuneration of the employee and akin to compensation. In a VSOP arrangement the company issues an allotment letter, which outlines the vesting schedule and other relevant details such as eligible employees, price etc. Eligible beneficiaries who accept the offer receive virtual shares according to the predetermined vesting schedule. These virtual shares entitle beneficiaries to benefits such as dividends, exit proceeds, or an IPO, depending on the terms of the agreement.
VSOPs issued to Employees
Services provided in the course of employment are not taxable. Any activity including sale, transfer, barter, exchange, license, rental etc. made or agreed to be made by a person for consideration in the course or furtherance of business constitutes a "supply". Schedule III of the CGST Act, specifically excludes services provided by an employee to its employer in the course of employment. In our view, VSOPs are incentives received by the employee under the terms of the employment agreement and must be treated as consideration for the services provided in the course of employment. Thus, VSOPs will not qualify as a supply.
VSOPs issued by foreign parent to employees of Indian subsidiary
Even in respect of VSOPs issued by the parent company to an employee of the Indian subsidiary, it is in the nature of compensation for services rendered in the course of employment. The GST authorities are however taking a view that VSOPs are financial services provided by the foreign company to its Indian subsidiary and constitutes an import of service, thus taxable under GST.
Moreover, since the employees of the Indian subsidiary have no contractual obligations to the foreign parent company, no taxable service is provided to the foreign parent company.
VSOPs issued to non-employees
A company may also issue VSOPs to persons who are not employees, such as consultants, advisors etc. In this scenario, the incentive received by the beneficiaries could be treated as a consideration for future services by the GST Authorities.
Conclusion
VSOPs are a valuable tool for companies seeking to attract, retain, and motivate talent without diluting equity ownership. Companies will have to exercise caution while preparing employment agreements. They will need to demonstrate that the VSOP, whether issued by the employer or the foreign parent, is in the nature of remuneration for the services rendered in the course of employment.
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