Applicability of GST on employee recovery has always been under debate. Under service tax regime, companies were paying service tax on recovery from employees and same practice has been continuing under GST regime also.
Very recently i.e. on 16th December 2021, the Maharashtra bench of Advance Ruling Authority (AAR) in the case of M/s Integrated Decisions and Systems India Pvt. Ltd. has delivered a very important ruling. AAR held that part recovery of charges for ‘renting of motor vehicles services’ / ‘cab services’ from employees in respect of the transport facility provided to them would not be treated as ‘supply’ as per provision of GST and therefore, GST is not applicable.
Brief facts of the case:
1. The applicant is engaged in providing software development and support services to its holding company located outside India.
2. As a welfare, security and safety measure, the applicant is providing transport facility to its employees for which they are availing `renting of motor vehicles service’, ‘cab services’ from their vendors.
3. The applicant initially pays the entire amount to concerned service providers who provide them with cab services and subsequently recovers partial amount from the respective employees who avail of the said facility.
4. Further, the third-party vendor issues bill in the name of the applicant and charges GST therein. As regard to the payment to the third-party vendor, towards transport charges, the applicant recovers partial amount from the employees and bear the balance cost themselves.
5. Applicant does not avail Input Tax Credit of tax paid on such input services received.
The question was raised as to whether the partial amount recovered from the employees for facilitating transport to and from the applicant company’s premises through third party vendors, would be construed as “Supply of service” by the applicant to its employees.
Observations of the AAR
In terms of Section 7 of the CGST Act, 2017, for a transaction to qualify as supply, it should essentially be made in the course or furtherance of business. AAR finds that, the applicant is engaged in providing software development and support services to its holding company located outside India. The provision of transport facility to the employees is a welfare, security and safety measure and is not at all connected to the functioning of their business. Further, the said activity is not a factor which will take the applicant’s business activity forward.
AAR also finds that the applicant is not supplying any transport or lease/rental of vehicle service to its employees in the instant case. Further the transport or lease/rental of vehicle service is also not the output service of the applicant since they are not in the business of providing transport service. Rather, this transport facility is provided to employees by the third-party vendors and not by the applicant.
AAR further observes that the GST is discharged on the gross value of bills raised on the applicant by the third-party vendors. We also observe that the partial amounts recovered by the applicant from its employees in respect of use of such transport facility are a part of the amount paid to the third-party vendors which has already suffered GST. Therefore, in the subject case, the applicant is not providing transportation facility to its employees, in fact the applicant is a receiver of such services.
AAR further observes that in the case of an application filed by M/s Tata Motors Limited, a similar question was raised as to whether GST was applicable on nominal amounts recovered by Applicants from employees for usage of employee bus transportation facility. It was held that GST is not applicable on such nominal amounts recovered from its employees.
Accordingly, AAR of the view that for applicant, arranging the transport facility for their employees is definitely not an activity which is incidental or ancillary to the activity of software development, nor can it be called an activity done in the course of or in furtherance of development of software as it is not integrally connected to the business in such a way that without this the business will not function.
Thus, when the activity is not a “supply”, as per section 7 of the CGST Act, 2017, GST is not applicable.
Way Forward
As a normal practice, companies are recovering various expenses from its employees such as transport, canteen, mobile, insurance premium, notice pay etc. After going through the ratio discussed in this ruling as well as in the case of M/s Tata Motors Limited, we can say that GST is not applicable on any kind of recovery made from employees if the following points are considered:
1. Business activities are such that recovery expenses, if to be treated as “outward supply”, are not incidental or ancillary to the main business activities;
2. Input tax credit is not eligible and not availed on such expenses. This is because if input tax credit eligible and availed then indirectly we agree that it is in the course or furtherance of business.
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