GST implications on Transactions between employer and employee

Under GST regime, transactions between employer-employee and GST implications on the same are one of the major disputed areas.

GST is applicable on “Supplies” of goods and services. The term “supplies” has been defined in Section 7 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) which 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.

In this context, it would be read with the explanation to Section 15 of the CGST Act which provides that employer and employee will be deemed to be “related persons”. Accordingly, supplies by the employer to employees would be liable to GST even though these supplies are made without consideration since they are considered as related persons (except gifts up to Rs 50,000 which has been explained at the end of this Article).

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

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

Based on the provisions, we will now discuss some Employee-Employer Transactions in brief:-

A. Allowances v Reimbursements on Actual– Allowances like Transport Allowance, Uniform Allowance etc. are part of the employment contract. These are in lieu of the services provided by the Employee to his employer & hence the same will not be liable to GST.

With respect to reimbursements, the employee has incurred costs which are expected to be reimbursed by the employer since the costs have been incurred on the behalf of the Employer. Now, the employee will claim expenses from the employer & the question here arises that, whether the employer is able to take ITC on that Bills or not.

Different cases are possible now:-

• Reimbursement of expenses relating to goods/services taken from the registered supplier and the GST Number of the employer is quoted on the invoice – Vendor to charge tax (if taxable supplies) and employer entitled to claim credit subject to input tax credit restrictions referred to in Sec. 17(5).

• Reimbursement of expenses relating to goods/services procured from the registered supplier and the GST Number of the employer is not quoted on the invoice – Vendor to charge tax (if taxable supplies). And the employer is not entitled to take ITC of that Invoices.

• Reimbursement of expenses relating to goods/services procured from the unregistered supplier – Employer is required to pay tax under reverse Charge & the employer is entitled to take credit subject to input tax credit restrictions referred to in Sec. 17(5).

B. Gifts – Companies have a policy of giving gifts to employees. These could be Gifts on Birthday, Incentives, Completion of a specified period of service, Festivals etc. If these gifts are provided in cash – No tax since payment in cash is not a supply and hence not liable to GST.

Non Cash gifts have been as below:-

• Gifts forming part of the Employment Contract – If the company is under an obligation to provide gifts based on the terms mentioned in the employment contract say Rs 5,000 worth gift will be given on annually. The gift is a consideration for the services rendered by the employee and hence not liable to GST based on Schedule III (treated as a part of CTC).
• Gifts not forming part of the Employment Contract – If the company has a policy of providing gifts to employees like sales incentive, etc. as a Gratuitous Activity (i.e. Not a part of CTC), These will be treated as supplies to employees without consideration and attract GST.

> Please note that Gifts will be liable to GST only if the value of such taxable gifts exceeds Rs 50,000 in a year.

Now, our next question arises, whether the employer is entitled to take credit for such gift whose value is more than Rs. 50,000/-?

> The answer is a Big No. As it is specifically mentioned in section 17(5), that the credit is blocked for Gifts, irrespective of its value.

The actual wordings are- “goods lost, stolen, destroyed, written off or disposed of by way of gift or free Samples”

C. Notice Pay Recovery– Employees who resign from their job are obliged 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 the notice period is recovered by the employer.

Eg.  If the employer has to pay a salary of Rs 50,000 for a month and the unserved notice period is 15 days then the employer will recover Rs 25,000 from the employee as Notice pay Recovery.

Now, this notice pay recovery of Rs.25,000/- is a saving in expenses by the employer (income to the employer) i.e. consideration to the employer for “not serving the notice period”, which was employees’ contractual obligation & hence, The transaction is liable to GST.

D. Certain Benefits & Deduction at the concessional rate from salary towards benefits provided – Benefits given by the employer to the employee are a consideration for services offered by the employee to the employer.

Eg. Food provided by the employer to al the employees is exempt from GST.

But if the supply is at the discounted or concessional rate to employees like Food provided to employees at concessional rate and the amount is recovered from their salary is taxable under GST & its valuation is to be done at “Open market Value” to discharge the tax.

Based on the above, we can observe that w.r.t. employer-employee transactions, there are so many types of cases but not a single answer in “Yes” or “No”. All transactions need to be examined individually to understand that the tax impact as well the credit eligibility.