GST: Exclusions from Supply of Goods or Services – Services by an Employee to Employer in the Course of or in Relation to his Employment

Explore exclusions from the supply of goods or services under GST, specifically focusing on services by an employee to an employer in the course of or in relation to employment. Understand Schedule III of the CGST Act, 2017, and its impact on taxation in India. For detailed insights and assistance, contact us.

Understanding Schedule III of the CGST Act, 2017: Exclusions from Supply of Goods or Services – Services by an Employee to Employer in the Course of or in Relation to his Employment

The implementation of the CGST Act, 2017 has brought significant changes to the taxation landscape in India. While the Act defines “Supply” as any transaction or activity carried out for a consideration in the course or furtherance of business, there are certain exceptions to this rule. Schedule III of the CGST Act, 2017 outlines specific transactions and activities that do not fall under the purview of supply of goods or services, even if they meet the criteria for consideration and business involvement. In this article, we will explore the details of Schedule III and shed light on the exclusions it provides.

SCHEDULE III OF CGST ACT, 2017

General Overview

As we are aware that any transactions/activities which fall within the scope of “Supply” as per Sec 7 of the CGST Act, 2017 will be chargeable to GST. Further, while analyzing the nature of transactions/activities for the purpose of chargeability of GST, there are instances-

(i) Where there is no Consideration involved, but still it would be considered as “Supply” as per Schedule I of CGST Act, 2017.

(ii) There are certain transactions/activities which are either treated as supply of goods or supply of services as per Schedule II of CGST Act, 2017.

Under this Article, I am going to describe the activities/transactions, which although are falling within the scope of Supply i.e.

• There is supply of goods or services
• made or agreed to be made for a consideration
• in the course or furtherance of business.

Still such activities/transactions shall neither be treated as supply of goods nor Supply of services as per Schedule III of CGST Act, 2017.

SCHEDULE III OF CGST ACT

Schedule III of the CGST Act, 2017 enlist such transactions/activities which shall not be considered as supply of goods or supply of services depending upon its nature which are elaborated here. Let’s discuss all these one by one.

(I) SERVICES BY AN EMPLOYEE TO THE EMPLOYER IN THE COURSE OF OR IN RELATION TO HIS EMPLOYMENT

Under this, emphasis is place on any service provided where there is

• Relation of employer and employee are existing.
• Services are provided during the course of employment/ in relation to the employment.

If these two conditions are met, then it is outside the ambit of GST i.e. tax shall not be leviable on such activity/transactions.

Employer & Employee

There is no such definition of employer and employee under the CGST Act, but in terms of the Section 213 of the Labour Relations Act, an employee is defined as follows:

Employee-

a) Any person, excluding and independent contractor, who works for another person or for the state and who receives, or is entitled to receive, any remuneration; and

b) Any other person who in any manner assists in carrying on or conducting the business of an employer.

Employer-

An employer is an organization, institution, government entity, agency, company, professional services firm, non-profit association, small business, store, or individual who employs or puts to work, an employee or a staff member.

Note:

• It is important to note that services that are not in the course of or in relation to employment, however, shall be covered. For example, an investigation is required to determine whether a referral bonus earned by an employee is in the course of employment or not. If it is not part of their employment duties, such services will be subject to GST. Another consideration is whether the value of these services falls below the threshold of Rs. 20 lakhs.
• Furthermore, under the Explanation to section 15(5) of the CGST Act, the employer and employee are also treated as related persons. Therefore, the supply of goods or services between related persons, even if made without consideration, shall be treated as a supply under Schedule I of the CGST Act, 2017.
• It is worth mentioning that gifts with a value not exceeding Rs. 50,000 in a financial year from an employer to an employee shall not be considered as a supply of goods or services or both.

 (Non taxability of some services provided by employer to employee)

These services are not taxable

1. Gifts up to Rs.50,000 a year from the employer to the employee are exempt under GST. But, gifts amounting to more than Rs.50,000 are subject to GST.

2. A perquisite is a non-cash benefit given by an employer to an employee. Any supply made by the employer to the employee within the terms of the contractual agreement entered between the two is not subject to GST.

3. Free common facilities provided to employees as per the contractual agreement, such as transport facilities, membership of health club, uniform, training facility, canteen facility, subscription to journals etc., are not subject to GST. But, if a certain service does not form part of the contractual agreement between the employer and the employee, then it is subject to GST.

4. Any perquisite provided by the employer to its employee in terms of contractual agreement entered into between the employer and employee are in lieu of services provided by employee to the employer in relation to his employment. It follows therefrom that perquisite provided by the employer to the employee in terms of contractual agreement entered into between the employer and employee will not be subject to GST. (Circular No. 172/04/2022-GST).

The liability for payment of tax on provision of facilities to employees may arise when perquisites are outside the scope of employment agreement. The terms of contract or employment therefore plays a crucial role in determining the taxability of perquisites in the hands of the employer.

TAXABLE SERVICES BY EMPLOYER TO EMPLOYEE UNDER GST

• Sale/Transfer/disposal of Business assets by employer to employee with /without consideration. 
• Food provided to employees at concessional rate and the amount is recovered from their salary. 
• Notice pay recovery from the employee 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. 
• Companies might allow employees to retain asset like laptop when he quits the organization or allow the employee to use a company asset for personal purposes for consideration/ or no consideration.

Conclusion: Schedule III of the CGST Act, 2017 plays a crucial role in defining the scope of supply of goods or services under GST. By providing exclusions for specific transactions and activities, especially those between employers and employees, it ensures that certain services are exempt from tax. However, it is essential for businesses to carefully analyze their contractual agreements and understand the implications of taxable and non-taxable services to ensure compliance with GST regulations.