GST on Employee benefits/ Recovery from employees

The transactions between the employer and employee from GST point of view have been analysed in this article.

Related Party

The concept of ‘related parties’ is defined under the tax statutes to include certain categories of persons (legal entities and individuals) termed by law as ‘related parties’.

As per sec. 15 (1) of the CGST Act, 2017, the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration of the supply. In terms of clause (iii) of Explanation to sec.15, person shall be deemed to be “related persons” if such persons are employer and employee.

Further, a general clause has been inserted in the definition of “related party” to include any person capable of exercising an influence or control over another person in the making of decisions within the definition of ‘related party’.

Deemed Supply:

The taxable event in GST is supply. The definition of supply as per GST law is an inclusive definition, main ingredients of which are that it is made for a consideration and secondly it is in the course of furtherance of business. The law  has also included deemed supply also in Tax treatment, which means certain activities, specified in Sch.1 of the CGST Act, even made or agreed to be made without consideration shall be treated as supply.

Supply can be from employee to the employer or from employer to employees the employee to the employer and second from employer to employees. In first type of supply from the employee to the employer the same would not be treated as supply provided the same is in the course of or in relation to the employment. The second type of supplies from the employer to the employee like free foods facility, guest room facilities etc, all these will be considered as a supply even if they are made without consideration.

Gift & perquisites to employees:

Schedule-I (Section7 (1)(c )) of CGST Act, 2017 – Gifts and perquisites supplied by companies to their employees up to a value of Rs 50,000/- per year by an employer to his employee are outside the ambit of GST. However, gifts of value more than Rs 50,000/- made without consideration are subject to GST, when made in the course or furtherance of business. Gift has not been defined in the GST law. Commonly, gift is made without consideration, is voluntary in nature and is made occasionally. The businesses will need to keep a record of the gifts they give to employees and their value.

Whether the provision of a certain facilities is the supply of goods and service or is it the provision of benefit to employees arising out of an employment contractual obligation, is a very pertinent question in new GST era. The broad principle applicable would be:

Any facility which is common to all employees and there is no identified employee or customer i.e. free tea/coffee etc. in office premises, should not be covered under GST.

Any facility provided for official usage by employee in the normal course of employment, i.e. office laptop, parking etc. should not be covered under GST.

Reimbursement to employee of telephone bill, travel expenses, hotel bills, etc are not a supply by employer to employee and hence, should not be charged to GST.

Any other supply by the employer which is not in normal course of employment needs to be analysed on case to case basis for applicability of GST.

Under the GST, employer and employee are considered as related parties. If the employer supplies something to the employee, and payment, albeit subsidised, is received by the former, such a transaction may attract GST.

Valuation of Employee’s benefits:

GST is payable on the transaction value, but, transactions between related parties, such as employer and employee, attract the valuation rules. The valuation principle here is that if the open market value of such supply is available, then tax should be paid on such value. If the open market value is not available than the value of supply of goods or services of similar type and quality should be used. If neither of the two is available, then the value should be taken as 110% of the cost of production or manufacture, or cost of acquisition of such goods. And, if that is also not available, the value should be determined using reasonable means, consistent with the principles and general provisions of valuation rules.

In the light of above discussion, let us know examine each facility/ benefit from the taxability angle in GST; The table given hereunder examine some of the benefits .

Sr. No. Transaction Type Particulars GST Applicability
1 Joining Bonus  to New Employee Payment would be in the nature of contractual obligation and in relation to the employment. No GST
2 Incentives or performance bonus to employees Paid to employees, in relation to their employment No GST
3 Subsidised or free food to employees Company provides free or subsidised or free food to its employees or arranges catering services for festivals and other important events etc, No GST
4 Sponsorship and training related expenses Payments are made in relation to the employment No GST
5 Club or Gym Fees Providing free club or gym facility without any consideration from employees. Benefits are provided by company to all employees as a common facility and there is no such identified employee to whom supply is made. No GST
6 Mediclaim and personal accident policy for employee and family Part and Parcle of the CTC. This is a case of (1) No supply by company to its employees. (2) No recovery of premium from employees. (3) Service provider is Insurance Company and recipient is employee, not employer. No GST
7 Uniforms, shoes etc provided by the employer Providing uniforms, shoes, soaps, etc. to workers for safety and discipline purpose in the normal course of employment. No GST
8 Subsidised or free Cab facility A).  covered under employment contractual obligation then No GST liability on company. B).Not covered under employment contractual obligation – this transaction would be treated as supply by employer to employee. A). No GST.     B). GST Applicable
9 Cash bonus for referral by Employee Cash bonus is given by the company for referral service provided by the employee in the normal course of employment. No GST
10 Company’s guest houses to be used by their employees for personal purposes This facility cannot be treated as being related to the employment. The Employer would be liable to pay GST and the valuation could be based on the actual costs incurred by the employer.
11 Company pay Sitting fee to non-executive Directors of the company GST applicable under RCM (Presently No RCM) No GST
12 Recoveries made from employees towards parking fee, etc A). These payments cannot be treated as being related to the employment. B).If this facility is provided for official usage by employee in the normal course of employment and no consideration recovered from employees. (A). GST Applicable. (B)No GST
13 Notice pay recovery from employees This recovery from employee is as per the contract between the employee and the employer, and in the course of the employment. No GST
14 Payments under ESOP Transactions covered by the employment contracts, apart from being financial transactions. No GST
15 Staff Welfare  – Offsite Camping, party etc. Provide some staff welfare scheme like staff training program, offsite camping,  party etc for recreational activities.  There is no supply per se by company to its employees and it is in relation to employment. No GST
16 Employee’s transfer related payments – Movers and Packers, etc These are to be treated as in relation to the employment. No GST
17 Free accommodation to employees Free accommodation is provided as part of the employment contract. No GST
18 Long Service awards to employees Tt is common for companies to pay specified amounts/items  to employees who have completed specified years of service.These are to be treated in relation to employment. No GST
19 Reimbursement of Mobile,Telephone Bill, data card reimbursement, etc used for official purposes There is no underlying supply per se company to its employee. No GST
20 Recovery from employee for loss of company assets like, ID card/Calculator and other assets Such type of recovery is treated as “Recovery of Liquidated Damages”. No GST
21 Car on lease scheme The Company has purchased Cars on Lease scheme and given to an employee for official or business purpose. The Car is a asset of the company and such benefit is extended to the employee for the official purpose. No GST
22 Loans to employee without interest. Providing interest free loans to employees to pursue specific higher education courses or attend specified training sessions or for meeting personal exigencies.  There is no supply and these are financial transactions. No GST
23 Sale of used assets like laptop, desktop, furniture etc, to employees Such transactions are treated as supply of goods. GST Applicable.

Misc. reimbursements are not covered in above table.

Input Tax Credit on employee reimbursements:

According to section 17(5) of the CGST Act, ITC shall not be available in respect of supply of certain goods or services. Most of the employees related services received by employer will fall under this category and ITC will not be available.

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4 responses to “GST on Employee benefits/ Recovery from employees”

  1. joshiaj says:

    Good observations Mr. Dayal. I will review and reve. Thanks

  2. DAYAL KUNDANI says:

    Sir
    Very nice article
    I need your further inputs on the following

    1) long service awards beyond 50000 in gifts
    2) performance incentive as a package tour beyond 50000
    Whether the above two will still continue to be exempt in terms of schedule 1 explanation. Which is not in contractual terms but a policy framed by the company to reward it’s employees and motivation for better performance.

    With respect to director sitting fees according to my understanding is covered under sec 9(3) and not subject to 9(4)

    As the power to levy tax on reverse charge arrives from Section 9(3) of the CGST Act and Section 5(3) of the IGST Act which states that government may notify services on which reverse charge would be applicable. Vide notification dated 28th June 2017[1], Government had notified such services where Entry no. 6 of the same states that any services supplied by a director of a company to the said company would be covered under reverse charge. Similar services were covered in notification no. 4 dated 28th June[2] in respect of inter-state supplies.

    Therefore, there are two cases in which the RCM is applicable:

    Supplies notified by Government u/s 9(3)
    Taxable Supplies by unregistered person to registered person

    From the above it implies that director sitting fees would not qualify for exemption as being URD

    Yet another aspect discussed above on notice period recovery, according to me this will be subject to a supply of service because the moment the employee resigns the contractual obligation comes to an end and such recovery does not form a part of taxable income, but eventually it reduces the cost of employment for the company and taxable in the hands of the company.
    The above understanding can be substantiated from the recent ruling Wherin, the Ahmedabad Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of
    Nandinho Rebello1 (the taxpayer) inter alia held that
    only the actual salary received by the taxpayer post
    the deduction of notice pay by the employer as per
    the terms of the employment agreement is taxable.
    In other words, deduction made by the employer for
    not serving the notice period need not be considered
    as taxable salary and brought into the purview of
    income tax.

  3. joshiaj says:

    Thanks Sandeep

  4. Sandeep says:

    useful article explained in a lucid manner.

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