CA Swati Kharkia
With the advent of GST, many changes have come in the treatment of day to day transactions of the companies. One major change is the treatment of expenses by the employer for employee welfare. Before 1st July, all that was required of the management was to book the expense on employee welfare in their financials and then never turn back to the page again. But after 1st July, the management is compelled to think about how is he going to treat the facilities he is providing to his employees. An analysis of the provisions affecting the same has been done in the succeeding paras.
Schedule 3, Clause 1 of the GST Act, 2017 states that services by an employee to the employer in the course of or in relation to his employment is an activity which shall be treated neither as a supply of goods nor a supply of services. This means that the consideration paid by the employer to the employee i.e. the salary, shall not be levied to GST. But the question which arises here is that which activities can be treated as “in the course of or in relation to his employment”? It appears that all the components of CTC will be treated as being in relation to the employee services and hence not a supply. For instance, medical insurance given to employee is in relation to his employment and so it should not be levied to GST.
Now, Clause 2 of Schedule 1 of the CGST Act, 2017 states that supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business shall be levied to GST even if made without consideration. And, employer and employee are considered to be related persons in terms of Explanation to Section 15. So if the employee provides any goods or services to the employee, which is not a part of the employment agreement, it will be levied to GST at the open market value as per Rule 28 of the CGST Rules, 2017.
But the most confusing entry, is the proviso to Clause 1 of Schedule 2 mentioned supra. It states that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. But what the law makers forgot here was to insert the definition of gifts in Section 2 of the Act. What should be included and what should not be included in “gifts” is the most challenging issue. In such a situation, the meaning of gifts in the common parlance, is being applied here, i.e. gift is anything given to someone without any payment, and voluntarily. However, if the value of gifts exceeds Rs. 50,000 even by a single penny, will the entire value of Rs. 50,001 get levied to
GST? For instance, if the sum total of the value of gift vouchers given for being the star performer, gift hampers given on Diwali, tickets for tour given on promotion and the like, equals to Rs. 50,500/- in a year, is the employee required to pay GST on the entire value? Or is it that only the amount exceeding Rs. 50,000/- will be subject to GST? No such clarity is there at present and it is assumed that the entire value will become taxable in such scenarios.
Also, employee reimbursements is a challenging issue from the view point of GST leviability. The employee incurs certain expenses, like for example, traveling expenses for business tours, which are later on reimbursed by the company, whether such reimbursements will be taxable under GST as a supply of service? In my view, it should not be levied to GST because the employee has received the service from third party vendor, and the employer is only bearing the expense by reimbursing him the amount, he is not providing any service to the employee.
In the midst of so many questions, the tax experts have arrived at their own views. But it may not be legally tenable and become the subject matter of litigation in the days to come. It is really important that some clarification is issued by the government solving all the doubts and classifying all major transactions in this area into the proper categories. Let’s hope some circular is issued by the government soon, so as to solve the mystery behind all these questions.
P.S. – Whatever may be the tax complications surrounding the management, but one thing the employers should always bear in mind that its only when the employees believe that management is concerned about them as a whole person – not just an employee – are they more productive, more satisfied, more fulfilled, leading to more growth and more profit for the company.
Disclaimer: The views expressed in this article are strictly personal
Do you think CBDT should extend Tax Audit Report and relevant ITR Due Date? Please Comment, Vote, Retweet and Like.— Tax Guru (@taxguru_in) September 18, 2018