Levy of GST on notice-pay recovery from employees has always been a matter of debate since the introduction of GST. Though schedule III to CGST Act, 2017 clearly states that supply of service by an employee to the employer in the course of or in relation to employment is neither supply of goods nor supply of services. Still, the instant issue revolves around the fact as to whether the act of ‘non-compliance’ of service of notice period clause of employment contract by the employee, can be deemed to be an activity outside the course of employment.
In the fore-going paragraphs, an attempt has been made to analyze in detail the scope of the term ‘ in the course of or in relation to employment’ and deduce as to whether notice pay recovery from employees should be subject GST or not.
Whenever an employee joins or leaves an organization, he/she is bound by the terms of contract of employment.
Most of the employment contracts invariably require employees to serve the agreed notice period before he/she is allowed to exit from the organization post resignation. Furthermore, most of the employment contracts have a clause stating that if an employee wants to leave the company without serving the agreed notice period, then he/ she is required to pay an amount equal to the un-served notice period remuneration. This is called notice pay recovery, which is either recovered from the employee or deducted from the salary payable to him.
As per Section 7 of CGST Act, 2017 all supplies of goods or services or both made by a registered taxable person for consideration in course of furtherance of business attracts GST. However, Schedule I to CGST Act, 2017 provides that transactions between related parties in the course of furtherance of business are treated as supplies even if it is made without consideration. Explanation to Section 15 of CGST Act, 2017 provides that employer and employee are deemed to be related persons.
Combined reading of afore-mentioned provisions suggests that the supply made by an employer to an employee is liable to GST even if it is made without consideration (except gifts up to INR 50,000).
However, Schedule III of the CGST Act states that ‘services by an employee to the employer in the course of or concerning his employment’ are not considered as supply of goods or services. Therefore, employee remuneration is outside the purview of GST.
As discussed above, services rendered by employees in course of employment are exempted from levy of GST. However, following two distinct views emerge while analyzing the issue of levy of GST on notice pay recovery:
Considering the wide ambiguity prevailing on the instant issue as well as contradictory decisions coming on this issue, it is likely that government will soon come out with detailed circular on the issue to clarify the intent of legislature on the applicability of GST on notice pay recovery.