Page 20 - Banking Finance April 2022

LEGAL UPDATE

each secured assets given the large vol- AAR ruled that where the supply is ESOPs are shares, representing owner-
ume of such cases in big cities and de- between related persons, the value of ship in the company , given to its em-
feat the purpose of Sarfaesi Act, which such supply will be the open market ployees at a price lower than its fair
mandates expeditious handing over of value of that. In case open market value price in the market.
secured assets to secured creditors. value is not available, the value of sup-
Companies may decide to buy back
ply of goods and or services of like kind
ESOPs for various reasons including the
GST will be applicable on and quality will be the taxable value. intention of the promoters to offer li-
partner's property rented Further, it said that in this particular quidity to their employees holding
matter, the property being rented, and ESOPs, especially in case of unlisted
to partnership firm, AAR the supplier and recipient are related. companies which are not available to
clarifies Accordingly, Rule 28 (related with de- trade in the secondary market.
termining value of supply of goods/ser-
Goods & Services Tax (GST) is required Providing liquidity by unlisted compa-
to be paid for the properties rented vices or both between distinct or re- nies by periodic buyback of ESOPs is
out by the partner to his partnership lated persons) of GST Act will apply. also becoming an important consider-
firm, Tamil Nadu Authority for Advance "The activity of renting out immovable ation among startups. Controlling the
Rulings (TNAAR) has said. This will be properties owned by the applicant as equity dilution in the company could
applicable even if there is NIL rent. an individual person to the partnership also be another reason why promoters

The applicant, Chennai based firm, another individual person, in offer buyback of ESOPs.
Shanmuga Durai is the Managing Part- which he is a major shareholding part- The buyback of ESOPs is an act similar
ner of a partnership firm and also owns ner and Managing Partner, even with- to buying back of shares by an entity.
certain properties. The firm in which out consideration, is a taxable supply," Bharath Reddy, partner, Cyril
he is partner is carrying out businesses AAR said. Amarchand Mangaldas, said that the
in those properties, free of rent. This means GST is liable to be paid in buyback of shares from ESOP share-
In his application, he stated that under respect of properties of the applicant holders has to comply with the same
the Income Tax Act, it is clear that rented out to the partnership firm, to conditions as buyback from other
when the partner uses his property for carry out the business of the firm, even shareholders.
businesses carried out by the firm, then it is free of rent, as the "activity is in In case of a buyback, any capital gains
deemed rent does not arise. furtherance of business and amount to on tendering shares to the company is
supply" as per GST law.
The applicant sought clarity from AAR exempt from tax in the hands of inves-
under GST law for the same. AAR ruling is applicable only on the ap- tors. Therefore, ESOP holders need not
plicant and the jurisdictional tax officer pay any tax on gains made while ten-
The applicant raised four queries. First, in that particular matter. However, it
whether GST liability does arise in re- can be relied upon in similar matters. dering shares in the buyback.
spect of property of the partner used Also, Central Board of Indirect Taxes The exemption is available irrespective
by the partnership firm to carry out and Custom (CBIC) uses verdicts by AAR of the holding period or whether it is a
the business by the firm, free of rent. listed or an unlisted share, as per
and Appellate Authority (AAAR) in mak-
Second, if so, what is the relevant sec- ing changes in rules for everyone. Neeraj Agarwala, partner, Nangia
tion or rule or provision in GST law, Andersen LLP.
under which the partner of the firm is What are the tax implica- Note that the employee would have
required to pay GST on notional rent? already paid the perquisite tax (differ-
tions if firms buy back
Third, is it mandatory to execute ence between the fair market value of
rental deed between partner and part- their ESOPs? share allotted minus amount paid by
nership firm, when there is no further- In the last two years, a lot of startups the employee) on exercising the ESOPs.
ance of business for that partner? And such as Razorpay, Udaan, Swiggy and The value of shares tendered in the
fourth, what is the applicable valuation Zerodha bought back the employee buyback by all shareholders can be
rule, when consideration is not fixed stock options (ESOPs) from their em- higher than the amount set aside by
and not received by the Partner? ployees. the company for the offer. T

20 | 2022 | APRIL | BANKING FINANCE