CA Nitish Agnihotri

CA Nitish Agnihotri

GST is applicable on “Supplies” of goods and services. The scope of the term “supplies” has been elaborately defined at Section-7 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) which primarily includes transactions made for a consideration.

However, in cases referred at Schedule-I to the CGST Act, transactions are treated as supplies even if the consideration is absent which includes supplies between related persons when such supplies are made in the course or furtherance of business.

Provided that gifts not exceeding Rs 50,000 in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.

However, Schedule III to the CGST Act provides that “services by employee to the employer in the course of or in relation to his employment” will not be considered as supply of goods or services and hence GST is not applicable on services rendered by employee to employer provided they are in the course of or in relation to employment.

Hence, transactions which are excluded from the levy of tax for transactions between employee and employer are

1. Gifts by Employer to employee not exceeding Rs 50,000 in a Financial Year.

2. Supply of services by employee to employer in the course of employment

Based on the above statutory provisions, taxability’s of specified transaction are as follows:-

1. Provision of subsidized or free food-

In case of canteen services provided by a company to employees wherein food is provided at subsidized rate or free of cost, GST will be applicable in both the cases.

As per recent decision by the Authority of Advance Ruling in a case concerning Canteen charges-Recovery of food expenses from the employees for the canteen services provided by company would come under the definition of outward supply as defined under Section-2 (83) of the Act, 2017 and therefore taxable as a supply of services under GST.

Due to above mentioned decision of AAR Reimbursements on telephone charges beyond a certain limit, medical premiums for extra coverage, health check-ups, transportation, gym use, uniforms or even re-issue of identity cards could face GST.

2. Notice Pay Recovery

Employees who resign from their job are expected to serve notice period as mentioned in the employment contract. If the employee does not serve such notice period, the salary of the unserved portion of notice period is retained by the employer. Thus, if the employer were to pay a salary of Rs 50,000 for a month and the unserved notice period is 15 days then the employer will pay only Rs 25,000 as salary to employee.

The payment of Rs 25,000 by the employer consists of two transactions:-

  • Salary payable by the employer Rs 50,000 (Expense in accounting parlance) – Consideration to employee for employment covered under Schedule III and hence not liable to GST;
  • Notice pay recovery of Rs 25,000 (Savings in expense which can be viewed as income to the employer) – Consideration to the employer for “tolerating the act” of the employee to not serve the notice period which was the employee’s contractual obligation. This transaction is liable to GST.

3. Taxability of certain other transactions (Tabular  Representation)

Transaction Nature of Transaction GST applicability Input Tax Credit
Incentive Incentives are generally paid to employees in relation to their employment. GST shall not apply as such incentives are given to employees for services provided by them in course or in relation to employment. Hence, not taxable in view of Schedule III. N.A.
Club Facility Common Club facility is provided to all the employees. GST shall not be payable if club facility is provided to employees free of charge if GST has been paid by employer while procuring such services. ITC is not eligible due to restriction informed by Section-17(5).
Uniforms/ Accessories Company owned uniforms/ accessories. GST shall not be payable since it is not a supply. ITC shall be eligible.
Sale of used assets to employees Generally used assets such as cars, laptops, furniture, etc. are sold to employees. GST shall be payable as such transaction shall be treated as supply. ITC shall be eligible except the credits blocked under Section-17(5).
House on rent Companies generally provide houses on rent to employees for residential purpose and deduction is made from the employee’s salary. GST shall not be payable on renting of residential properties as the same is outrightly exempted. N.A.

Conclusion

In the awake of recent decision by AAR in case of canteen charges. GST on employer to-employee supplies could cause employers to stop charging for services rendered in a bid to save on that levy. Companies may have to start restructuring compensation packages or human resource benefits of their employees to ensure they don’t face taxing time under GST.

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