Background
There has been a spate of advance rulings under GST in regard to the employee recoveries made. The differing views expressed in these rulings have led to a great deal of confusion on whether GST is liable to be paid when amounts are recovered by the employer from the employee towards any facilities/services enjoyed by them.
In this background, the paper writer has examined in light of recent developments whether GST to be paid on recoveries made from employees by the company.
GST on employee recoveries for facilities
Schedule III sets out that the services by an employee to the employer in course of or in relation to employment is neither supply of goods nor supply of services[excluded from GST levy]. Schedule I however has entry 2 which sets out that supply between related persons, in course of business is taxable to GST, even when there is no consideration for same. However, the gifts are given to employees not exceeding Rs. 50000 per employee per annum is excluded from tax.
Employee is related person of the company. When goods/services are given to employee, whether entry 2 of Schedule I gets attracted. In view of paper writer when the facility is given to employees FOC basis no GST on employer company. Also when facility given under terms of employment contract, GST would not be levied on same.
At this juncture, the following aspects are significant to arrive at conclusion-
- GST is leviable only when there is a supply being made of goods/services for consideration.
- Amounts are being recovered from employees for example canteen/transport facility esp when given by third-party vendors[no involvement of employer -does not retain the part amount recovered] .
- Employer would pay part of the value of canteen/transporter bill, on behalf of employees, and not involved in the provision of any supply in this regard.
- Further, the employer could be the manufacturer of finished products or supplier of different services and not a supplier of canteen/transportation business. Accordingly would not be said to be engaged in such activity in normal courseof its day-to-day business either.
- Company can claim that in absence of supply of any such facility/ services done by it to employee, GST levy fails.
- No supply in terms of Section 7(1) of Central Goods and Services Tax Act, 2017.
- Similar lines when life/health insurance is being provided to employee and dependents and recovered costs of his dependents can contend that the supply of service is by insurer company and not by the employer, consequently not leviable to GST.
When such stand is taken, it could be supported by having a specific clause in the employee contract that the facilities are being provided in relation to employment and recoveries made out of salary.
Similar view was given in the press release of July 2017 extract as under:
…It is pertinent to point out here that the services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods or supply of services). It follows therefrom that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST…... It follows, therefore, that if such services are provided free of charge to all the employees by the employer then the same will not be subjected to GST, provided appropriate GST was paid when procured by the employer.
Notice period recovery
Such recovery is done when the employees do not serve out their notice period. in a case where an employee wishes to quit, it is incumbent upon the employee to put the employer to notice in advance of a stipulated period to enable recruitment of a new employee and smooth transition of the work carried on by the employee, who proposes to quit. It also facilitates a situation where the employee may desire immediate quitting by enabling him to do so, however, also ensuring that some compensation is provided to the employer by virtue of the sudden and unexpected termination of duty.
A contract of employment qua an employer and employee has to be read as a whole, and notice pay, in lieu of sudden termination, however, does not give rise to the rendition of service either by the employer or the employee. This would be incorporated by a clause in the employment contract itself. When there is no supply done by the company against such amount, then GST cannot be levied either.
It was held that notice period recovery cannot be taxed in the plethora of decisions under erstwhile ST law as well in following:
- GE T & D India Limited v. Deputy Commissioner of Central Excise [TS-1254-HC-2019(Mad)-ST] held that service tax is not leviable on the payment received by the Petitioner in lieu of notice period paid by the outgoing employees.Employer not rendered any taxable service or tolerated any act of the employee but has merely facilitated sudden exit of employees by imposing cost upon them for such an act - Notice pay in lieu of sudden termination does not give rise to rendition of service either by the employer or by employees.
- Similarly in the case of M/s. Gujarat State Fertilizers & Chemical Ltd (2016) and Allahabad CESTAT in case of M/s. HCL Learning Systems Vs CCE, Noida (TS-1125-CESTAT-2019-ST).
GST Advance rulings
In the few of earlier rulings, such as in Caltech Polymers Private Limited TS(DB)-GST-AAAR(KER)-2018-319 upheld that the recovery of food expenses from employees for canteen service is covered under 'outward supply' definition within scope of Section 7 of CGST Act, 2017, and liable to GST. Similarly in Amneal Pharmaceuticals Pvt. LtdAdvance Ruling No. GUJ/GAAR/R/50/2020. In Beumer India Pvt Ltd [2020-VIL-316-AAR] held that free transport provided by an employer to ferry employees to work is subject to goods and services tax (GST).
Thereafter several decisions seem to have concurred that GST would not be levied when merely amounts recovered and paid towards such facilities to employees. In Tata Motors Ltd (Advance Ruling No. Guj/GAAR/R/39/2021) Authority has ruled that where canteen charges are borne by the employer and only a nominal part is charged from employees, no GST would be payable on such recoveries. Further the advance rulings such as in Dakshina Kannada Co-op. Milk Producers Union Limited [TS(DB)-GST-AAR(KAR)-2021-448; Dishman Carbogen Amcis Limited TS(DB)-GST-AAR(GUJ)-2021-480; Bharat Oman refineries ltd-MP/AAAR/07/2021; Emcure pharmaceuticals ltd -GST-ARA-119/2019-20/B-03 in context of canteen charges collected from employees and paid to third party contractor have held that GST is not applicable.
In other Advance Rulings such as in Tata Motors Limited TS(DB)-GST-AAR(MAH)-2020-470; Emcure pharmaceuticals ltd -GST-ARA-119/2019-20/B-03 held that tax is not payable on the recoveries made from the employees towards providing transportation facility.
It may be noted that advance ruling is applicable to an assessee who has sought it and to their set of facts. It has limited persuasive value to others and may be adopted when in line with the provisions of law.
The recent rulings in favour of non-levy of GST on recoveries seem to be aligned to GST provisions.
Way ahead
The companies who have been discharging GST on recoveries made could take the call to stop paying tax under-acknowledged letter to dept setting out with reasons, quoting favourable decisions why not liable to be paid and ask to confirm understanding. This would ensure that sustainable demand of tax on such recoveries cannot be made with interest and penalty.
To be on a safer stance, the companies making nominal/negligible recoveries may stop collecting from employees same. Such facilities can be given as part of the employment contract on free of cost basis instead.
Conclusion
In this article, the paper writer has sought to examine the recent issues in GST of employee recoveries.
The author can also be reached at roopa@hiregange.com
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