The employer is expected to provide certain facilities to the employee for ensuring that they are able to effectively carry on their duties. Some are even set out as statutory obligations. These may not be there in the terms of contract with the employee. The 'gifts' could be one time, due to festival, marriage, birth of child, business related (car company giving free service, mobile company – lower tariff, garment company (clothes) etc.
The amounts given in relation to employment like performance bonus, GST extra work compensation, suggestions award, excellence award would not be considered to be gifts.
Entry in Schedule III to CGST Act covers only Services by an employee to the employer in the course of or in relation to his employment. Supply made by the employer to the employee is not covered in the entry and hence subject to GST.
Such supplies would be supplies where there is no contractual obligation of the employer nor he is required to provide for such facilities in the normal course of business. Such supplies could be termed as gifts. In the press release of the government, the gifts have been explained as per common parlance as 'gift is made without any consideration, is voluntary in nature and is made occasionally. It cannot be demanded as a matter of right by the employee and employee cannot move a court of law for obtaining a gift'. For example, cell phones given on the occasion of Diwali to the employees would be considered to be a gift.
If any supply constitutes as a gift, such gifts shall be taxable. However, gift value upto Rs 50,000 per employee per financial year shall not constitute to be a supply for the purpose of GST and shall not be taxed. If the value of gift exceeds the given limit, entire amount shall be constituted as a supply. It is to be noted that gift shall constitute to be a supply only when the gift given is either a good or a service. Cash gifts given shall not be a supply as money has been specifically excluded from the definition of goods and services. However under Income tax one would lose the deduction. Gift above Rs. 5000/- are liable to IT. Therefore this aspect may also impact the giving of gifts.
What shall happen if the employer is providing some facility to the employee and at the same time, charging something from the employee against such facilities? Such recovery could be partial or full, varying from company to company. Where full recovery is being made, such facilities could not be said to be gifts. Such facilities shall amount to be a supply from an employer to employee and shall be leviable to GST. Where partial recovery is being made, the same could be said to be supply to the extent of the recovery made, and the remaining could constitute to be a gift or a facility provided to all the employee and shall not be leviable to GST. The employee could claim the ITC corresponding to the supply made by it (provided that the credit of the same is otherwise eligible).
For example, where the employer is providing catering facilities to its employees, say of Rs 5,000/- each month to each employee and recovering Rs 3,000 per employee per month, then the extent to which recovery is made i.e. Rs 3,000/- shall amount to a supply and the company needs to discharge GST on the same. Rs 2000 could be covered as a facility provided to all employees. However, department could contend that being related party transaction, tax needs to be discharged on entire vale of Rs.5000/- and not Rs. 2000/-.
The credit of catering could be taken by the company to the extent of the recovery made from its employees (credit of food and beverages, outdoor catering shall be eligible where such inward supplies have been incurred for making the outward supply of the same category).
In another example, an employer takes employees to picnic where cost incurred per employee is Rs. 1,00,000/- Employer recovers Rs. 75,000/- from employees and balance 25,000/- is incurred as cost by employer. To the extent of money received i.e. Rs. 75,000/- it shall be treated as supply and subject to GST. Balance Rs. 25,000/-, not in the nature of facility under contractual terms, could be said to be gift by employer and would be considered for exemption limit of Rs. 50,000/- p.a. per employee.
The applicability of GST on an activity carried out by the employer needs to be analysed on case to case basis considering various factors like terms of employment, general industry practice, personal usage element, the structure of carrying out the transactions, the ultimate beneficiary of the transactions or the recipient of supply etc to evaluate the taxability as RCM as well as in the hands of employer as gift.
This article has been adapted from the Book on Classification & Exemption to be published by Bharat Law House by end August 2107.
The authors can also be reached at madhukar@hiregange.com,vasant.bhat@hiregange.com and nagendra@hiregange.com.
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