ESOP AND ESPP (Syllabus: GS Paper 3 - Economy

Context: GST authorities are raising inquiries in cases where shares of a foreign parent or holding company are being allotted to an Indian subsidiary’s staff under schemes like employee stock option plan (ESOP) and employee share purchase plan (ESPP).

Employee stock ownership plan (ESOP)

• An employee stock ownership plan (ESOP) is a type of employee benefit plan which is intended to encourage employees to acquire stocks or ownership in the company.
• Under these plans, the employer gives certain stocks of the company to the employee for negligible or less costs which remain in the ESOP trust fund, until the options vests and the employee exercises them or the employee leaves/retires from the company or institution.
• These plans are aimed at improving the performance of the company and increasing the value of the shares by involving stockholders, who are also the employees, in the working of the company. 
• The ESOPs help in minimizing problems related to incentives.

Employee share purchase plan (ESPP)

• An ESPP is a program in which employees can purchase company stock at a discounted price.
• Employees contribute through payroll deductions, which build until the purchase date.
• Income or loss from the sale of shares purchased through an ESPP is generally taxed as a capital gain or loss, though there are holding period requirements.