Managing Tax Collection at Source for Equity Plans in India

Non-India headquartered companies with stock plan participants (Indian employees and/or directors) in India are probably aware of the compliance requirements introduced in 2022 by the Foreign Exchange Management (Overseas Investment) Rules ( OI Rules). For an overview of the new rules, see the Blog post “Impact of New Exchange Control Rules in India on Equity Awards.” As far as the impact of the OI Rules on equity plans offered by US headquartered companies are concerned, the most significant impact is on outward remittances made for employee stock purchase plan (ESPP) contributions.[1]

Poll: How Are You Complying with India’s TCS Rules?

I discuss the implications of the OI rules for equity plans and possible approaches below. But before I get to that, I have a short poll on current company practices. Complete the poll to see how other companies are managing compliance (see below for further discussion and examples of the various approaches covered in the poll):

If you aren’t able to see the poll above, click here to complete it.

Background

Under the Liberalized Remittance Scheme (LRS), India resident individuals are permitted to remit up to US $250,000 outside of India every tax year without any prior consent from the Reserve Bank of India (RBI), but consent from the RBI is necessary for any outward remittances made above this threshold. The OI Rules introduced, among other things, an obligation on Authorized Dealer (AD) banks to collect Tax Collected at Source (TCS) on foreign remittances made under LRS that exceed a threshold of INR 700,000, per individual resident, per tax year.

TCS is not applicable to any foreign remittances made under INR 700,000 cumulatively, per individual, per tax year. INR 700,000 is approximately US $8,500 at the time of writing. The India tax year is April 1 to March 31 of the next year. An AD bank is a bank that has a license with the RBI to deal in foreign exchange (purchase or sell) or foreign securities. Most commercial banks in India are AD banks.

As individuals may remit funds through different AD banks, the RBI has obligated the AD banks to obtain a record of prior remittances made under LRS during the applicable tax year. RBI is also developing a centralized database to track remittances made by Indian residents.

Remittances Made Under LRS Above the INR 700,000 Threshold

Individuals are allowed to remit amounts above INR 700,000 per tax year under LRS (up to the US $250,000). However, remittances made beyond INR 700,000 by participants toward their participation in any stock plan of the US issuer are subject to collection of Tax Collected at Source (TCS) at the rate of 20%. TCS may be credited against such participants’ overall tax liability.

Concerns Related to Equity Plans

For stock option exercises, any remittances made outside India to pay the exercise price are made by the individual participant. Under the OI Rules, cashless exercises are within the scope of LRS. If subject to TCS, the participant will have to work with their AD bank to ensure that the full exercise price is remitted to the US issuer.

However, with ESPP, the contributions are usually sent to the US issuer, i.e., parent company, by the local employer, i.e., Indian subsidiary of the US issuer. Many AD banks have taken the position that the remittances made by the local employer on behalf of its participants are subject to TCS. This means that the ESPP contributions reaching the US issuer for the purchase of shares may be reduced by the TCS amount. Companies seem to be dealing with TCS in different ways, and local employers should seek advice from their tax advisors and AD banks prior to making any remittances for ESPP.

How Are Companies Handling the TCS on ESPP Contributions?

Some companies have not needed to take any action either because the ESPP contributions collected for their employees are below the threshold or their AD bank has taken the position that the TCS collecting requirement does not apply to corporate remittances.

Those companies who have had to address TCS are doing so in different ways, including:

• Reducing ESPP contributions for the imposition of TCS. For example, for every INR 100 collected in ESPP contributions above the INR 700,000 threshold, only INR 80 is being used to purchase shares.
• Collecting TCS contributions in addition to ESPP contributions through payroll. For example, for every INR 100 collected in ESPP contributions, another payroll deduction of INR 25 is made to cover the TCS.
• Paying the TCS tax on behalf of employees. Some companies require the employees to reimburse their portion of the TCS. Other companies are fully funding the TCS; however, companies should note that the funding of TCS on behalf of employees (without being reimbursed by the employee) may be deemed taxable benefit.

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[1] Different rules apply to Indian participants who hold or control 10% or more of the parent company’s share capital, which are not addressed in this article.