Over the period of time, GST as a law has made great progress by clarifying various aspects of the law and these clarifications have resulted in a good comfort towards the new law that was implemented in a hustle following the path of most fast developing and developed nations. However, the issue of employee recoveries has not been explicitly dealt by the CBIC except for few advance rulings issued by the advance ruling authorities which don’t have any legal validity for entities other than the entity to which such ruling has been given. Also, no specific clarification with respect to notice pay recoveries has been issued via any circular.
This article is an attempt to discuss whether any GST would be leviable on different types of employee recoveries and the opinions of various advance ruling authorities on the issue.
Employee recoveries are generally on cost-to-cost basis i.e. the cost incurred by the entity for providing certain facilities is charged on actual basis from employees, like – cab expense recovery, food expense recovery, laptop repair recovery etc.
However, for certain expenses costs cannot be determined on actual basis and thus entities need to charge as per certain agreed amount generally computed on the basis of costs or the loss incurred by the organisations. Examples can be – Notice pay recoveries, cab recoveries where the cab is of the company and canteen expense recoveries.
Let us discuss each recovery having major impacts on decisions of the tax team of entities.
Notice Pay Recovery
As per the site factohr.com, Notice period recovery is the amount the employee has to pay in case of leaving the organization before the end of the notice period. The amount can also be deducted from the earning components (salary) of the employee.
To analyze whether notice pay recovery is a supply or not, we need to analyze whether it is in the course and furtherance of business of the entity. Also, it is to be understood whether any service is provided by a business entity to such employee or any third person on behalf of the employee in return of the recoveries made from employees.
Notice pay recoveries as Business
In a more general sense GST is not applicable on non-business transactions which occur due to some specific happenings not in the general course of business. To understand this let us first analyse the definition of business under the GST law. The inclusive definition of business is given in section 2(17) of the CGST Act, 2017 relevant extracts of which are as under –
(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
(b) any activity or transaction in connection with or incidental or ancillary to sub-clause-(a);
(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;
(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation
As per the above definition activities which are necessary for providing the goods or services supplied by the business for the main purpose for which it was established shall be considered in the course of business. Notice pay recoveries are not necessary for carrying out such activities and is only a procedure and internal control system established by the management of the business to resist employees to leave on shorter notices.
Notice pay recoveries as service
Service under GST act is defined as anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged …..
Also, as per entry 5(e) of Schedule II of the CGST Act, 2017 agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act shall be treated as supply of services.
Hence, now we can ponder upon whether any toleration of an act or situation is done by the entity recovering the amount in lieu of notice pay recoveries. In this regard, a view can be taken that the entity in case of early leaving of employee is not helping the employee to get any additional benefit for itself and also no loss is caused to the entity for which amount is recovered. This view is further clarified in the circular no. 178/10/2022-GST. As per the said circular, The provisions for forfeiture of salary or recovery of bond amount in the event of the employee leaving the employment before the minimum agreed period are incorporated in the employment contract to discourage non-serious candidates from taking up employment. The said amounts are recovered by the employer not as a consideration for tolerating the act of such premature quitting of employment but as penalties for dissuading the non-serious employees from taking up employment and to discourage and deter such a situation. Further, the employee does not get anything in return from the employer against payment of such amounts. Therefore, such amounts recovered by the employer are not taxable as consideration for the service of agreeing to tolerate an act or a situation.
Also, another view can be taken in this respect can be to consider the notice pay recoveries as a consideration for helping the employee to leave early irrespective of the notice period and thus enabling the employee to get a better employment opportunity earlier than she was supposed to. Further, the entity will be tolerating the act of the employee and thus may suffer loss due to the hampering of work done by her in regular course. Thus this view as being opposite to the view mentioned in the earlier para will consider notice pay recoveries as made for supply of services, thereby imposing the charge of GST on the same. In this case the notice pay recoveries will be taxable @18% on the amount so recovered under the SAC code 999794.