GST is applicable on “supply” of goods and services. As per GST laws, supply is inclusive of all sale, transfer, exchange, barter, license, rental, lease or disposal – made for consideration and shall be in course or furtherance of business. Supply can be from employee to the employer or from employer to its employees. Any supplies made by an employer to its employees will be taxed in GST.


The term ‘gift’ means the transfer by one person to another of any existing movable or immovable property, voluntarily and without consideration in money or money’s worth. Gifts upto 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. The question arises as to what constitutes a gift. Gift has not been defined in the GST law. In common parlance, gift is made without consideration, is voluntary in nature and is made occasionally. It cannot be demanded as a matter of right by the employee and the employee cannot move a court of law for obtaining a gift.

However, any cash payment made by an employer to an employee on any occasion shall be treated as an ex-gratia payment and not gift.


A perquisite is a non-cash benefit granted by an employer to its employee. Under the Income Tax Act, a perquisite is defined as a benefit which an employee avails of or is entitled to on account of the employee’s job or position in the enterprise. It is pertinent to point out here that the services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods or supply of services). It follows therefrom that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST.

Free common facilities not taxed

Common facilities provided commonly to employees without any recovery would not be subject to GST as they cannot be considered as gifts, provided they form part of contractual agreement.

1. Telephone / mobile services

2. Internet services

3. Education reimbursement for employees’ children

4. Transport facilities

5. Membership of gym, health club etc.

6. Subscription to journals

7. Canteen facilities

8. Coffee / tea and other beverages during office hours

9. Training facilities

10. Parking services

11. Insurance for self and family

12. Uniform including shoes

13. Access to furniture and other infrastructure

14. Office tours / trips

Applicability of GST on Notice Pay Recovery

Employment services are exempted from GST. Therefore, there is one school of thought that as notice pay recovery is in the course of employment, the same is also exempt from GST. But it should be noted that Schedule II of the CGST Act states certain activities that shall be treated as a supply of goods or services. Such activities include ‘Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation’. To this, there can be a different point of views:

It could be contended that an employer receives the notice period pay from the employee for not serving the notice period prescribed by the employer. The action of not serving the notice period leads to tolerating the act of an employee of non-service of notice period. Thus, GST is applicable to notice pay recovery.

In the erstwhile regime, there were crucial decisions made in favour of the assessees stating that such notice pay recoveries are not subject to service tax:

1. Order of Commissioner (Appeals) in case of M/S Gujarat State Fertilisers & Chemical Ltd – It held that cessation of employment is treated as employment service not liable for the service tax.

2. Allahabad CESTAT in case of M/s. HCL Learning Systems Vs CCE, Noida – It held that the amount recovered out of salary already paid is not subject to service tax.

Under GST regime there are no such case references, however AAR Gujarat in the matter of Amneal Pharmaceuticals (P.) Ltd. has observed that where a company, at time of appointing any employee clearly mentioned in appointment letter that his services can be terminated by giving notice or notice pay in lieu of notice period from either side, the Company shall be liable to pay GST on recovery of notice pay from employees who are leaving company without completing notice period as specified in appointment letter.

The Company shall be liable to pay GST @ 18% under the entry of “services not elsewhere classified”, on recovery of Notice Pay from the employees who are leaving the company without completing the notice period as specified in the Appointment Letter issued as per the contract entered between them.

It may thus be concluded that recovery of notice pay dues of employee/payment of notice by the employees who are unable to serve the notice period as per their appointment letter/contractual agreement will attract GST.

Allowances v Reimbursements on actuals:

Allowances like Transport Allowance, Uniform Allowance etc. are part of the employment contract. These are considerations for service provided by employee to employer and not supplies by the employer and hence the same will not be liable to GST.

With respect to reimbursements, employee has incurred costs which are expected to be reimbursed by the employer since the costs have been incurred on the behalf and at the instance of the employer. The employee will be able to claim reimbursement of the expenses based on the invoices received from the vendors and input of GST may be availed by the Employer where his GSTIN is provided. Where expenses are incurred by an employee on behalf of his employer, then the employee shall provide his employer’s GSTIN and other relevant details for availing ITC of GST subject to provisions of the Act.

ITC on Festival Gifts

A taxpayer shall be eligible to claim input tax credit on the gifts purchased by it and distributed to persons related to business but there shall be no ITC with respect to the sweets and other eatables purchased for distribution to workers/employees or any gifts distributed to the employees by the employer.

List of relevant blocked credit in context of employee costs:

1.For motor vehicle having approved seating capacity of not more than 13 including driver: ITC on motor vehicle would be admissible in following cases:

  • When used for the purpose specified- onward supply of vehicle/supply of transport of passengers/ training services on motor vehicle driving

ITC on leasing, renting or hiring of such motor vehicles for transport of persons is available as follows:

  • When used for the purpose specified- onward supply of vehicle/supply of transport of passengers/ training services of motor vehicle driving
  • Where inward supply of such service is used by the registered person for making an outward taxable supply of same category of goods or services/ or as an element of a taxable composite or mixed supply
  • Where it is obligatory for an employer to provide such services to its employees under any law for time being in force

Credit on general insurance/repairs/maintenance in respect of such motor vehicles as follows:

  • When used for specified purposes given above-onward supply of vehicle/supply of transport of passengers/ training services on motor vehicle driving

For motor vehicle with approved seating capacity of more than 13 persons, no restrictions on availing vehicle related credit

2. The credit is restricted on food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, life insurance and health insurance: Input tax credit in respect of such goods or services or both shall be available where

A. An inward supply is used for making an outward taxable supply of the same category or as an element of a taxable composite or mixed supply.

B. When obligatory for an employer to provide such services to its employees under any law time being in force

3. Membership of a club, health and fitness centre, travel benefits extended to employees on vacation such as leave or home travel concession. Input tax credit shall be available where It is obligatory for an employer to provide to its employees under any law for time being in force

4. The credit on goods/ services, when used for personal consumption, is restricted.

5. Employer shall be entitled to avail ITC in respect of all inputs like medicines, equipment, furniture, etc. consumed in hospitals and input services like maintenance and upkeep of hospitals, etc., to provide health services to its employees and their dependents as per terms of Ordnance Factory Medical Regulation. (AAAR Maharashtra in the matter of Ordnance Factory)

Eligibility to credit on specific commonly incurred expenses:

1. Credit of tax paid on uniforms/safety shoes/protective head gear/helmets: These are used by the employees of company, in course of business. These could be worn on shop floor as protection for employees when engaged in different manufacturing activities or processes/ against heat/cold/dust particles etc. The employer would be eligible to such credit.

2. Telephone/mobile expense: The credit is eligible when used in course of business. However, department may deny whole/part alleging personal use by employee. A reasonable portion may be reversed for personal use [based on past experience] to ensure such objections to credit availed are not raised at time of audit. Similarly held in CCE, Goa vs Hindustan Coca Cola (P.) Ltd. (March 10, 2015)

3. Air travel by company directors/employees: Expenditure incurred on air travel by employees/directors of the company for official purpose is eligible for credit subject to proper documentary evidence. Similarly held in CCE vs Fine Care Biosystems (2009 (244) ELT 372 (CESTAT) and Goodluck Steel Tubes Ltd. Vs C. C. Ex., Noida 2013 (32) S.T.R. 123 (Tri. – Del.).

4. Lodging/Boarding: The input tax credit on hotel rent for employees/executives for business and client meetings is directly relatable to assesses business. Therefore, credit could be admissible. Similarly held in One Advertising & Communication Services Ltd. vs C.S.T., Ahmedabad (2012 (27) S.T.R. 344 (Tri. – Ahmd.).

However, in National Aluminium Company Ltd Advance Ruling Order No.02/ODISHA-AAR/18-19 Dated 28th September, 2018 issue was whether the applicant is entitled to take input credit of tax paid on various goods and services used for maintenance of applicant’s townships, guest houses, hospitals and horticulture for paying output tax. Held that service by way of residential accommodation in the colonies or otherwise is a perquisite which has been clarified as not chargeable to GST implying thereby any perquisite including residential accommodation is an exempt supply. In the result, the inward supplies received by way of management, repair, renovation, alteration or maintenance service or goods received for furnishing the residential colony shall not qualify for input tax credit in terms of Section 17 (2) of the OGST/CGST Act. The services which are being availed clearly in relation to the residential colony shall not qualify for input tax credit. AAAR_Odisha upheld the decision of AAR_Odisha.

Further, in Posco India Pune Processing Center Pvt Ltd (2019-TIOL-25-AAR-GST) where issue was credit eligibility for hotel which is used as a residential accommodation by the MD/GM. Held it implies that the same is used for their personal consumption. Providing residential accommodation in a hotel is not in furtherance of the applicant’s business. Since the accommodation is being used for their personal comfort, in view of the provisions of s.17(5)(g) of the CGST Act, applicant is not eligible to claim the ITC for the same

5. Outdoor catering: When outdoor catering services are given for providing food to staff. Facility provided because of statutory obligation imposed under Section 46 of Factories Act, 1948 and it becoming condition of service as far as employees concerned credit shall be made available on such expense. Accordingly held in Stanzen Toyotetsu India Pvt. Ltd. vs. C. C. Ex., Bangalore-III 2009 (14) S.T.R. 316 (Tri. – Bang.) Affirmed in 2011 (23) STR 444 (Karnataka High Court). Credit available.

It can thus be concluded that credit could be available when food/drink facility is given in discharge of obligation under law, but maybe disputed by the Department.

6. Employee accident insurance: As it is not health/life insurance the credit could be eligible. There is no policy for health and accident together. Accident insurance is necessary for the Company to provide to employees. It is in furtherance of business In Milipore India Ltd Vs CCE Bangalore –II (2009 (236) ELT 145 (Tri-Bang). Affirmed in 2012 (26) STR 514 (Karnataka High Court) held there was no restriction on availment of such insurance credit. Department may dispute accident insurance may be covered as per the Insurance Act within health. Risk is if denied then credit reversal could be subjected to 24% interest as well When co takes call to avail such credit intimate dept by RPAD letter plan to avail and seek confirmation on eligibility to such credit. If objected, reverse under protest with a letter setting out why it is available. The decisions referred above under erstwhile laws have persuasive value under GST as well.

Eligibility to credit when recoveries made from employees towards canteen/cab/insurance:

When recovery done towards canteen facility: The recovery towards canteen is taxable at 18%/12% from 1.7.2017 to 14.11.2017 [with input tax credit] and at 5% [without input tax credit post that date]. Tax to be paid on valuation as under Rule 28 of GST rules, i.e., on open market value of same or similar services or cost plus 10%. Tax can be paid on value determined based on contractor invoice. It is significant that when such food/drink credit is specifically enabled when tax is paid on outward supply of same category of services, whether such credit should be restricted via notification no.11/2017-CT (Rate) when output GST is paid at 5%. Such condition restricting the credit may not be correct as a notification cannot be permitted to over-ride the enabling provisions in the law.

Recovery done for employee transport facility: The recovery towards transportation services is taxable at 5% from 1.7.2017 to 13.10.2017 [without input tax credit] and at 5% [with input tax credit post 13.10.2017]. Tax to be paid on valuation as under Rule 28 of GST rules, i.e., on open market value of same or similar services or cost plus 10%. Tax may be paid on value determined based on contractor invoice.

GST on Director’s Remuneration:

Directors’ remuneration refers to compensation the company gives to its directors for the services rendered. This can be through fees, salary or by use of a company’s assets.

CBIC has clarified the applicability of GST on director’s remuneration vide CGST circular no. 140/2020 dated 10th June 2020. As per the GST law, services provided by an employee to the employer in accordance with the employment agreement are neither considered as supply of goods nor supply of services. Hence, GST is not leviable in such cases. However, if the services are not classifiable as employer-employee relationship, then GST is levied on such remuneration. In that case, company (service recipient) will be liable to deposit the GST dues on reverse charge basis with the government as per Notification No. 13/2017.

GST applicability on the Non-executive Director’s Remuneration: Non-executive directors are not involved in the day-to-day working of the company. They are usually involved in planning and policymaking in the best interest of the company. Further, the relationship is mostly ‘Contract for Service’, TDS under Section 194J of the Income Tax Act gets attracted on the remuneration/fees paid, which is accounted in the books of accounts separate from the head ‘Salaries’. The services provided by a non-executive director to the company is subject to GST and will fall under the reverse charge mechanism of GST.GST rate at 18% applies to the total amount of directors’ remuneration.

GST applicability on the Independent Director’s Remuneration: Independent Directors do not have any direct relationship with the company. They usually give expert advice to the Board of Directors as and when required. They do not take part in the day-to-day business of the company and are not classified as an employee/partner/proprietor of the company for at least three years prior to being appointed as an independent director. Hence, GST applies to remuneration paid to Independent Directors. RCM is applicable, and therefore the company, which is the recipient of services, is liable to pay GST at 18% on the total amount of director’s remuneration.

GST applicability on the Whole Time Director’s Remuneration:

(1) Where the whole-time director is an employee of the company:

Criteria to be satisfied for the director to be called as ’employee’ are as follows:

1. Contract of Service: The activities of the director is in the course of employer-employee relation.

2. TDS under Section 192 of the Income Tax Act applicable on the salary paid to the director.

3. Accounted in the books of accounts under the head ‘Salaries’.

If either of the criteria is fulfilled, then GST is not charged on the remuneration paid to the company’s executive/whole-time director/managing director.

(2) Where the whole-time director is not an employee of the company:

Circumstances where the director is not classified as ’employee’ are as follows:

1. Contract for Service: Irrespective of the name and designation of the director, the activities of the director are professional services as a director.

2. TDS under Section 194J of the Income Tax Act applicable on the fees/remuneration paid to the director.

3. Accounted in the books of accounts under a separate head distinct from ‘Salaries’.

If either of the criteria is fulfilled, the services provided by a director to the company is subject to GST at 18% and will fall under the reverse charge mechanism of GST.

Valuation for payment of GST:

Where the transaction between employer and its employees without consideration is considered as supply of goods or services or both as per Schedule I of the Act, then such transactions between employee and employer are treated as related party transactions and therefore, transaction value would not be applicable for levy of GST. Rule 28 of CGST Rules 2017 would be applied for valuation of supply when the transaction is between related parties.

According to Rule 28, the value of supply which should be considered by employer on recoveries from employees should be as below:

a) open market value

b) if open market value not available, value of like kind or quality goods or services

c) if value is not determinable according to a) or b) above, then cost of services + 10% or residual method should be adopted.

Open market value could be adopted which could be value paid by the employer to the original supplier. Accordingly tax would be applied on such taxable value at appropriate rate based upon the nature of supply.

Author Bio

Qualification: CA in Practice
Company: D J A S & Co.
Location: Kolkata, West Bengal, India
Member Since: 28 Jun 2019 | Total Posts: 6
Deepak Jain is a member of the Institute of Chartered Accountants of India, having more than 7 years of post-qualification experience in the field of Banking, Taxation, and Audit. A graduate from St. Xavier’s College, Calcutta, he started his career as a Relationship Manager (Eastern India) at View Full Profile

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June 2021