GST on Short Notice Recoveries

The core strength of the successful companies are its human resources who possess challenging skill sets and that’s the reason that a high demand exists for such skillful personnel. The talent acquisition by today’s corporate world is undertaken in a very organized and systematic manner, and the set procedures and policies are applicable for their separation too. One such important aspect which is quite common nowadays is the concept of Notice period, where a parting employee has to serve for a period generally ranging from two to three months.

Concept of Short notice recovery

An employee is expected to intimate the company with a formal resignation well in advance and shall serve a period of at least two to three months before quitting the job and shall continue to work in the same role till completion of such period and this period is called as ‘notice period’. In case of employee not serving the mandated notice period, the company could rightfully recover an amount called as short notice period recovery as per the company’s policy or terms of employment contract.

Provisions during Service Tax Regime;

According to Section 66E (e) of the Finance Act, 1994, as inserted by Finance Act 2012, agreeing to the obligation to refrain from an act, or to tolerate on act or a situation, or to do an act shall be a declared service and liable to service tax.

Provisions under Goods & Service Tax;

As per Section 7(1) (d) of the CGST Act, the expression “SUPPLY” Includes;

“(d) the activities to be treated as supply of goods or supply of services as referred to in “SCHEDULE II”.”

Further as per SCHEDULE II, below are the “ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES”

1. Transfer

2. Land & building

3. Treatment or Process

4. Transfer of Business Assets

5. Supply of services;

The following shall be treated as supply of services, namely:—

(a)…

(b)…

(c)…

(d)…

(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and

In terms of entry above under Section 66E (e) and entry no. 5(e) of Schedule II under Section 7 of CGST Act , the following activities if carried out by a person for another for consideration would be treated as provision of service.

• Agreeing to the obligation to refrain from an act.

• Agreeing to the obligation to tolerate an act or a situation.

• Agreeing to the obligation to do an act.

The question of the implication of Section 66E (e) in Service Tax regime and entries in 5(e) of Schedule II of Section 7 of CGST Act on notice pay are discussed as follows:

a. The condition to pay an amount as notice pay in lieu of notice period for the employer to agree to let go an employee, normally forms part of the terms and conditions of employment.

b. The employee can exercise the option of paying the notice pay as the consideration for the employer to agree to the obligation of letting him go, which the employer is bound to do as it is the part of the terms and conditions already agreed to and settled between them.

Opinion;

In our view therefore this transaction of the employer agreeing to the obligation of tolerating an act on the part of the employee, for payment of a notice pay will be covered as a declared service under Section 66 E (e) and as a supply under 5(e) of Schedule II of Section 7 of CGST Act.

Begani & Begani
Chartered Accountants