GST on relinquishment of rights

[Rakesh Jain]

• A professional entered into a contract with a company.

• As part of consideration, the professional was entitled to equity compensation (shares / ESOP / sweat equity / similar).

• Subsequently, the professional cancelled / relinquished the right to receive equity.

• Instead, the company paid a monetary amount to the professional.

The critical question is whether the amount received for cancellation of equity rights is:

• consideration for supply of services, or

• a non-taxable capital transaction / actionable claim, or

• consideration for tolerating an act / refraining from an act under GST.

[Sadanand Bulbule]

This does not constitute supply of service under Section 7. Hence not liable for GST.

[Ryan Vaz]

Applicable Law / Circulars (India)

1. Section 7, CGST Act, 2017 – Scope of “supply”
2. Schedule II, para 5(e), CGST Act – “agreeing to the obligation to refrain from an act, or to tolerate an act, or to do an act” treated as supply of services
3. Schedule III, CGST Act – Activities neither supply of goods nor services
   • Actionable claims (other than lottery, betting, gambling)
4. Section 2(102), CGST Act – Definition of “services”
5. CBIC Circular No. 178/10/2022-GST dated 03-08-2022 – Liquidated damages, cancellation charges, penalties
6. CBIC Circular No. 214/1/2024-GST dated 26-06-2024 – Clarification on taxability of compensation, damages, penalties, and cancellation of contracts
7. GST Council jurisprudence / Advance Rulings on contract cancellation and ESOP-linked arrangements (principle-based)

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Short Practical Answer

In most genuine ESOP / equity-linked professional arrangements, the amount received for cancellation of equity rights should not be treated as consideration for “tolerating or refraining from an act” under GST.

The tax treatment generally falls into two possible buckets, depending on the true character of the contract:

1. Non-taxable (most defensible position):

The payment is a capital / contractual settlement for extinguishment of an equity-linked right (akin to an actionable claim or capital receipt) ? Not a “supply” under GST.

2. Taxable as consideration for services (exception cases):

If the equity cancellation payment is clearly a substitute for professional fees or services rendered/to be rendered, then it can be treated as consideration for supply of services ? GST applicable.

It should ordinarily not be taxed as “tolerating an act / refraining from an act” merely because a right was relinquished.

[KASTURI SETHI]

Dear Querist,

There are many case laws available in your favour on this very issue. Easily traceable on various websites.

AI Summary

Settlement payments for cancelled ESOP/sweat equity rights: debate whether amount is 'consideration' for GST 'supply' u/s 7 Payment received by a professional on cancellation or relinquishment of a contractual right to equity compensation (shares/ESOP/sweat equity) is debated as to whether it constitutes 'consideration' for a 'supply' under section 7 of the CGST Act. One view asserts that mere extinguishment of an equity-linked right is not a supply of services and is therefore outside GST. Another view notes that GST may apply only where the payment is in substance a substitute for professional fees or otherwise linked to services rendered or to be rendered, whereas it should not ordinarily be treated as consideration for 'agreeing to refrain from an act or tolerate an act' under Schedule II paragraph 5(e); accordingly, GST liability depends on the true character of the settlement payment.