Background
Under negative list based taxation w.e.f. 1.7.2012, all the services other than those which are mentioned in the negative list or subject matter of exemption is liable to service tax.
It is to be noted that service provided by employees of the company (who are under employment with the Company) are governed by the exclusion clause contained in the definition of ‘Service’ under Section 65B(44)(b) which provides that service provided by employees to their employers in the course of or in relation to employment and are not liable for service tax.
It is necessary that the services should be provided by an employee to an employer. The relation of employer and employee is a prerequisite for coverage under this exclusion.
Service tax is leviable on any activity for a consideration. In terms of the definition, any ‘activity' undertaken by the employer, to the employees, is not excluded from service tax levy.The status of the employee would be as a service recipient rather than as a mere employee when consuming such service.
In this context it would do well to remember that the Government had issued a draft circular F.No. 354/127/2012-TRU dated July 27, 2012 which was intended to provide clarity on various cases of supply of manpower. It had also covered the taxability of services by directors who are on board of company, treatment of supplies, reimbursements by employer to employees and ex-employees. This circular was not issued finally thereafter.
In this article the paper writer has restricted examination to the service tax implications of recoveries made from employees post 1.7.2012.
Payments/recoveries from employees by employer and service tax
Taxable Services provided for consideration:
A number of activities are carried out by the employers for the employees for a consideration. Service tax is leviable on gross amount charged as consideration for taxable service. Where the employees pays for such services [which are not covered in negative list/exemption entry], it is liable to service tax.
However, when services may be provided against a portion of the salary foregone by the employee.Then such activities could be said to be provided for a consideration and thus liable to tax.
Exempted services:
When activities done by employer to employees are exempted / excluded from service tax levy, then there is no service tax applicability on the service provider company.
Examples of such services on which service tax is not payable could be the guest house accommodation services would not be liable to tax if the tariff for such unit of accommodation is below Rs.1000 per day or equivalent (S. No. 18 of the Mega exemption). Further the services of food provided by the employer in a canteen would normally fall outside the tax net unless such canteen has air-conditioning (S. No. 19 of the Mega exemption.
Facility provided on free of cost basis:
At same time, facilities such as health clubprovided to employees free of charge shall not be considered as an activity for consideration. The facilities which may used without any deduction from the salary could not be liable to service tax.
Reimbursed expenses:
The Company could incur certain expenditure such as telephone on behalf of the employees and later recover the same at actuals by way of recovery from salary. Section 68(2) read with Rule 5(1) of the Service tax (Determination of Value) Rules, 2006 provides that any expenditure or cost incurred, shall be included in the value of taxable service for the purpose of computing service tax.
Further in the Finance Act, 2015 w.e.f. 14.05.2015 explanation to Section 67 which was defining ‘reimbursement’ was amended to read as follows:
“(a) "consideration" includes- (i) any amount that is payable for the taxable services provided or to be provided;
(ii) any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed;
Thereby the reimbursements would also become part of taxable value post this amendment, until the said provision is challenged and held to be invalid. The exception to this provision was to incur the expenditure or cost as a pure agent and satisfy the elaborate conditions as mentioned in the said Rule.
Availment of credit attributed to services provided to employees:
Whether Cenvat credit to extent of employee recoveries charged to service tax could be availed? The input service definition restricts credit on certain specified services such as when used predominantly for personal use or consumption of employees.
Examples could be such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation, when such services are used primarily for personal use or consumption of any employee
In view of paper writer Cenvat credit for inputs and input services used to provide such services on which service tax is paid would be eligible. When the output tax is being paid, the related input service credit should be eligible as well.
Notice Pay Recovery
Notice pay recovery is the consideration received by the employer for letting the employee to vacate his office earlier than the notice period requirement. Under the negative list based taxation regime, services provided by employer to employee, is still within the definition of service and could be subject to service tax.
Whether the notice pay recovery could be considered as “accidental damages due to unforeseen actions not relatable to the provision of service” under Rule 6(2)(vi) of ST (Determination of Value of Service) Rules 2006, and excluded from service.According to Education Guide, the accidental damages are not to be included in provision of service provided if following conditions are satisfied:
- The damages are due to unforeseen actions
- The damages are not related to provision of service.
Employee leaving the office is not an unforeseen circumstances and it is related to provision of service being provided by employees. The conditions mentioned in Education Guide are not met. Therefore it could not be considered as accidental damage due to unforeseen actions and is liable to service tax under Section 66E(e) of Finance Act.
Employer could contend service tax is leviable on any activity for a consideration. There is no activity being done by employer in exchange for notice pay recovery, service tax levy fails. Revenue could object this act could be termed as “agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act” which is a declared service u/s 66E (e) of Finance Act, 1994.
If employer decides not to pay service tax on such recoveries advisable to intimate department by RPAD letter why it is not liable to service tax, with reasons and seek confirmation of understanding of same.
Recent decision
In recent decision in Gondwana Club Vs Commr of Cus & CE, Nagpur (2016-TIOL661CESTAT-MUM) where held activity of the appellant to provide accommodation to staff members does not come within the definition of Renting of immovable property service. Contractual privileges of an employer-employee relationship are outside the purview of service tax.
Comments:
This decision was under earlier service tax law where service tax levy was attracted only on the specified taxable services set out in sub-clauses of section 65(105). This decision could have limited validity in the context of present service tax law where under service tax is applicable on all activities for consideration other than those which are excluded or exempted from service tax levy.
In this article the paperwriter has sought to examine the implications of employee recoveries under service tax. The authors can also be reached at madhukar@hiregange.com or roopa@hiregange.com.
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