Executive Summary
This article is presented dealing a comprehensive study on the overall transaction between employer and employee. In generally, transaction arising out of contractual arrangement as per Schedule III are not subject to GST. However, if it is not as per contractual arrangement or hits other provisions like Schedule I Para 2 or Schedule II Para 5(e) then such transaction become taxable under GST. Further, director remuneration which are not shown as salary or TDS u/s 194 J has been deducted, entity is liable to deposit GST under RCM basis. Complexity involved for employer and employee transaction has been dissected in this article.
Introduction
First of all, let us have an idea of definition of employee, employer, related parties and consideration.
Clause 31 of Section 2 of CGST Act 2017 defines the word consideration as “consideration” in relation to the supply of goods or services or both includes––
1. any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
2. the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government Provided that deposit given in respect of the supply of goods or services shall not be considered as payment unless it is applied as consideration for supply.
Analysis: So, consideration has a wider meaning and not concerned to money only, it covers- if there is an obligation to tolerate or refraining from any activity as well.
Example: I) If a bus driver on daily basis halts in a specific restaurant against which he gets free meal there, this is also covered under definition of consideration (an example of inducement).
II) However free supply as in case of warranty is not covered under definition of supply. Related party has been explained under explanation of Section 15 of the act which read as:
i) Such person are officers or directors of one another’s business.
ii) Such persons re legally recognised partners in business
iii) Such person are employer and employee
iv) A person directly or indirectly owns, controls r holds twenty-five percent or more of the outstanding voting stocks or shares of both of them.
v) One of them directly or indirectly controls the other
vi) Both of them are directly or indirectly controlled by a third person.
vii) Together they directly or indirectly controls a third person
viii) They are members of same family.
The word employer and employee are not defined in the act.
So, it is clear from the definition of related party that employer and employee are related party.
Provision for Levy of GST
Let’s look the binding provision for employer and employee as per Schedule I and Schedule III of the act.
Para 2 of Schedule I (containing the activities which are considered as supply even if made without consideration) of the act state that supply of goods or services or both between related persons or between distinct person as specified in section 25 when made in course or furtherance in course of business.
Provided that gift not exceeding 50,000 in value in a financial year by an employer to an employee shall not be considered as supply.
GIFT has not been defined under GST. By press release, CBIC has clarified that meaning of gift shall be taken as per common parlance that means which is not demanded by employee nor employer is under obligation to give the same, it’s a matter of free will.
Para 1 of schedule III (containing the activities which are considered neither as supply of goods nor supply of services) states: Services by an employee to the employer in the course or in relation to his employment.
Point to be noted is that it covers only service and not goods that too originating from employee and not from employer. So, a lot of difficulty has been seen for the employer for understanding the impact of GST for the services they provide to their employees, which have been covered as below:
This was about levy now let’s understand the provision regarding valuation, if the supply is made between the related parties:
Rule 28 covers the valuation principle when goods or services are being supplied between the related parties or distinct person thereof.
As per the rule value of such supply shall be
i) The open market value (OMV) of the supply
ii) If OMV is not available value of supply of goods or service of like kind and quality
iii) If the value is not determinable as per above clauses, then value as per Rule 30 (110% of cost incurred or cost of acquisiton) or Rule 31 (reasonable means in line with section 15) in that order.
Provided that if supply of goods between related party are meant for further supply, then supplier may value the supply at 90% of the price charged for like kind and quality goods to non-related recipient.
Second proviso states that if recipient is eligible for claiming ITC then, the invoice value shall be deemed to be value of supply.
Analysis and Practical Scenarios
A Conjoint reading of the above provisions would create a lot of questions and other difficulty in practical scenarios which have been dealt as follows:
1. What does “in the course or in relation to his employment” means?
> In course or in relation to employment may be considered as such services which are in scope of the contractual agreement between employer and employee.
2. What an employer should draft in the contractual agreement that would consider the services provided by them to fall under scope of para I of schedule III?
For answer to this question, following practical scenarios has to be analyzed thoroughly:
1. Notice pay recovery
It is retention/recovery of money which was to be paid otherwise, had the employee served the notice period after his resignation.
If employee had served the period, then it would fall under the scope of Schedule III as contractual arrangement between employer and employee exists over such period and hence would not be chargeable to GST.
If employee has not served the notice period, then employment period comes to an end on the very day employee fails to continue the unserved notice period and hence do not fall under schedule III. It would be termed as an obligation to tolerate an act (of employee) by employer, which is defined as supply of service under para 5(e) (ii) of Schedule II and hence is chargeable to GST. Valuation has to be done as per Rule 28.
Example: Mr. Sham has forwarded a resignation letter on 1/4/2021 for which as per contractual arrangement, he has to serve 3 months’ notice period before he is relieved. He served for the period of two months i.e. till 1/6/21 and thereafter he left the office.
Pay upto 1/6/2021: say Rs. 50,000 p.m. is under scope of schedule III and hence not a supply.
Recovery from employee for one month i.e. July of Rs. 50,000 shall attract GST as employment has been ended and it is consideration for tolerance of employee’s act.
AAR (Advance Ruling Authority) Gujarat in the matter of Amneal Pharmaceuticals (P.) Ltd has also held the same fact as stated above.
Same conclusion will be reached for any such other arrangement which is otherwise fixed in a contract with employee like bond recovery, if employee left within a specified period.
Example: Mr. X has resigned the office on 25thApril 2021 and wanting to join other company XYZ ltd, which is in urgent requirement of an employee. As per policy of old company ABC ltd., he has to serve notice period of 3 months in total but as XYZ ltd wants Mr. X at an earliest, thus Mr. X has been offered to pay his notice pay by XYZ ltd. Will this notice pay be covered under purview of Schedule III or Schedule II?
> There are two transactions here as:
i) X paying Notice pay to ABC ltd: Undoubtedly, this will come under purview of Para 5(e) (obligation to tolerate Mr. X act of relieving without serving notice pay) of Schedule II and hence is subject to GST as explained in above para.
ii) XYZ ltd paying an early joining payment to Mr. X who is ultimately paying in the form of Notice pay to ABC ltd: This may be considered as in terms of employment for payment by XYZ ltd to ABC ltd and hence come under purview of Schedule III Para 1 and is not subject to GST.
2. Gifts
As mentioned above, gift has not been defined in the GST law and upto value of Rs. 50,000 is not considered as supply of good or services. Thus gift has a wider concept to get into. It is very clear that good or services specifically exclude money, so, cash payment by employer to employee is not a supply at all. However, for non-cash transaction a deep plunge into the contractual agreement is required.
If specified under contractual agreement: As specified in Schedule III, it shall be treated as in course of employment and hence is not supply. For example: Rs. 50,000 worth gift on completion of 5 years or on annual day, gift in any other form which is predefined as per contract between employee and employer.
If not specified under contractual agreement: Schedule III do not prevent such transaction and shall be chargeable to GST. Example: Gratuitous act on achieving some sale target, etc.
Example: If an employer provides his employee with a Car, which has been purchased by employer availing ITC for its business purpose.
Two para of Schedule I are to be analyzed for taxability. If the value of Car is upto Rs. 50,000 (valuation has to be done as per Rule 28 and not invoice value as employee is not eligible to avail ITC), then it is out of para 2 but it comes under para 1 of schedule 1 and hence, it will be chargeable to GST.
Other perquisite like transport/accommodation/internet/canteen/parking/uniform/office tour/journals/membership gym also falls under term GIFT and hence if they are provided free of cost then it will be chargeable if value as per Rule 28 exceeds Rs. 50,000 per employee in a financial year.
ITC to employer
Coming to ITC provision for employer, it has been specifically restricted under section 17(5)(b) (i), (ii) and (iii) for availing ITC on such inward supply which are not meant for any furtherance of business which includes foods or beverages, outdoor catering, health services, life insurance, membership of club, health and fitness center, travel benefit extended to employee on vacation, etc. Thus, even if the supply comes under Para 2 of Schedule 1, no ITC shall be available to employer in any of the cases.
3. Services like accommodation/transport/internet/canteen/parking/uniform/office tours/subscription to journals/membership to gym/health club, etc. to employee.
3.1. Free to employee: Case has been covered above in section of Gift i.e. it is not chargeable to GST provided it forms a part and parcel of cost to company and same is provided in terms of agreement with employee.
3.2. At concessional rate: For this scenario, an analysis of some of the ruling has been produced as below:
a) M/s Tata Motors Limited [Advance Ruling No. GST-ARA- 23/2019-20/B-46 dt. 25.08.2020]
AAR of Maharashtra in this ruling has held that its due to existence of employee and employer arrangement, there is service of bus facilities which has been taken by employer (inward supply for employer) and used by employees. Had there been no employer and employee relationship, there would have been no any such services. So, it comes under purview of para 1 of Schedule III and not chargeable to GST. Moreover, only nominal amount has been charged from employee.
b) AAAR Kerala in the ruling of M/s Caltech Polymers Pvt. Ltd. [Order No. CT/7726/2018-C3 dt. 09.2018],
The company was running a canteen service with cook, employed by it, who was being paid monthly salary, with all the expenses pertaining to vegetables, rice, flour, etc. being expended by the company itself in compliance of Section 46 of The Factories Act, 1948 because it has employed more than 250 employees in its main business of footwear. The company was charging cost with no profit element of such food from its employees’ salary. AAAR held that the company has been making statutory compliances with the employee but the service of canteen provided by it comes under the definition of supply as defined in section 7 of the act and the consideration charged from the employee as defined in 2(31) of the act. Thus, the income from the food is chargeable to GST as per this ruling.
Point worth noting is that the advance ruling is applicable only to the applicant of advance ruling as per section 103 of the act.
An inference could be drawn from these advance ruling is that:
a) If employer is procuring the service to supply the same for its employees: though nominal amount is charged, it is not liable to GST. (as in Tata Motors)
b) If employer is in-house arranging the facility of canteen/bus(owned)/parking(owned) and others, then it will be chargeable to GST and employer has to pay tax on it. (Caltech Polymer case).
Exemption notification has also to be correlated before concluding the taxability as in case of accommodation provided to employee, If charging of rent is upto Rs. 1000 then it falls under exemption vide serial 12 (heading 9963or 9972) (residential dwelling) or serial 14 (Heading 9963) (commercial upto Rs. 1000) of notification for exemption and hence GST will not be charged upon it. Rule 28 as described above has also to be considered for determination of value of supply.
Similarly, other cases like subscription to journals, membership of health club or fitness center, office tours, etc. may be dealt in same manner as above.
Provision of ITC to employer:
As restricted over Section 17(5), employer will not be eligible to ITC. But, if Caltech polymer case is analyzed along with reading of 17(5)(b)(i), then if food or beverages, outdoor catering, etc. inward service has been taken to provide an outward supply (as has been treated as outward supply (be taxable composite or mixed supply), ITC should be available to Employer in this case.
However, for travel vacation or membership to health and fitness center or club is completely restricted for avail of ITC unless it is obligatory under statutory provision.
4. ESOPS
Goods have been defined in CGST Act u/s 2(52) as: every kind of movable property other than money and securities but includes actionable claim and growing grass, crops and things attached to or forming part of land which are agreed to be severed before supply or under a contract of supply. Section 2(101) defines securities by referring to section 2(h) of Securities Contract (Regulation) Act 1956. Section 2(h)(iii) defines securities to include right or interest in securities. Thus, ESOP shall be covered under definition of securities and hence is out of Scope of GST.
5. Reimbursement as per bills or allowances
Allowances simply is generally covered under contractual arrangement and hence is not subjected to GST.
A brief analysis on reimbursement is required to draw a conclusion on its’ taxability:
Reimbursement is pay to employee against the expenses which they have incurred for the business or at the instance of employer. On basis of invoice issued by vendors, employees are allowed to claim reimbursement from their employer.
What happens to employer on such cases: if employee has procured goods or availed services from a registered vendor and GSTIN of employer is mentioned in invoice, subject to restriction, employer may avail ITC on it.
However, if either vendor is not registered or no GSTIN has been mentioned in invoice, then
employer shall not be eligible for ITC.
This was regarding to ITC which employer would be entitle or not.
Coming to taxability between employee and employer: Indirectly, employer is bearing cost of GST as well and hence it becomes taxable to employer in this case which it is paying indirectly through its employees to the respective vendors.
Other cases may be like Per diem payment for hotel stay or per day travel to specific countries or location irrespective to actual bills. Such Per diem is as per contractual arrangement as it forms a part of general HR policies generally and hence are considered as a part or in course of employment and no GST will be charged on it.
6. Festive gifts
Usually on Diwali or any other festivals, employer expends for gifts purchases like sweets, dry fruits, clothes, etc. for their employees as well as their business partners.
Whether ITC would be available in this case or not?
> Eligible to avail ITC for distribution to other business partners as it amounts to furtherance in course of business.
> However, no ITC shall be allowed if it is given to employee as there is no any furtherance of business in this case.
Whether this will be treated as supply between employee or employer?
> For this, para 2 of Schedule I, limit of Rs. 50,000 has to be checked to determine the taxability of GST.
For example: XYZ limited has procured four sweets items box from Bikanervala for Rs. 700/ box and has distributed 1000 of such box to its employees and rest 500 to its business partners. As it comes under section 17(5)(b)(i) foods and beverages, and assuming business outward supply is not related to food supply, no ITC will be available to XYZ limited in either of the cases.
7. Director Remuneration
Though service provided by employee to employer are not subject to GST as per Schedule III para 1 but as per Notification No. 13/2017 –Central Tax (Rate) dated 28.06.2017, government has notified that remuneration to director shall be chargeable under reverse charge mechanism. In case of non-whole time director or non-executive director or independent director, it is of sure that GST under RCM shall be leviable. But in case of whole time/executive/managing directors following condition has to be analyzed for the compliance with any of the three conditions:
a) Contract of service: The director is involved in whole time employer –employee relation. Or,
b) TDS u/s 192 of Income tax act is being deducted for the for salary paid to director. Or,
c) Salary paid has been accounted in books of account under head salaries.
Then, GST is not chargeable in this case.
If it has been that such directors are not classified as employee:
a) Contract of service: Irrespective to designation, if services provided are professional in nature. Or,
b) TDS u/s 194 J of Income tax act is being deducted for the for remuneration paid to director. Or,
c) Salary paid has been accounted in books of account under head other than salaries.
Then, GST will be chargeable under RCM basis @ 18% and employer has to pay GST on it as a service recipient.
8. Sale of laptop/car, etc. to employee
It is quite often seen that employee on their resignation are allowed to take away the laptop with them. It is of course a supply under GST. If on procurement of such asset, entity has taken ITC, it will come under purview of both Para 1 Schedule I and Para 2, Schedule I and if not taken ITC, then it will come under purview of Para 2 of Schedule I provided the value as per valuation Rule 28 as defined above is above Rs. 50,000 in a financial year in case of an employee.
Similar case happens, if old car or any other asset is sold to employee by employer.
Example: If a smartphone manufacturing entity sells its smartphone at 40% discount, then applying Rule 28 (as section 15 is not applicable as they are related parties) Open market value or value of like kind and quality if OMV is not available or in absences of above two, 110% of cost of production shall be taken as transaction value for computation of GST though sale will be recorded as net of discounts.
9. Whether an employer (CA firm) acting as representative for employee before Income tax authority falls under purview of Schedule III or Schedule I?
> It falls under purview of Schedule I para 2, as it is not as per employee- employer contractual arrangement and hence is a supply chargeable to GST, provided amount as per Rule 28 exceeds Rs. 50,000 in a financial year for an employee.
10. Whether amount paid by employer for termination of employment before their retirement comes under purview of supply?
> Since the payment made is as per the contractual arrangement between employer and employee and the payment is for termination of such agreement, thus it is not chargeable to GST in hands of employer. In other words, such amount is treated as in relation to employment and hence is not treated as supply of goods or services as per para 1 of schedule III.
11. Whether an employee providing service to an associate/subsidiary company of employer on contract basis comes under purview of Schedule III?
> No, it does not come under purview of schedule III assuming that the contractual arrangement does not specifically specify the obligation of employee to work under its subsidiary or associate company as well. Thus, this is a supply. Had initial agreement states such provision, then it would amount to in relation to employment and hence would not be chargeable to GST as per Schedule III.
12. Non – compete fee: Non- compete fee are generally given post completion/termination of such arrangement of employer and employee relationship to avoid any competition in the market and hence are subject to GST.
13. Salary Advance to employee as loan: This is considered as in relation to employment and is out of purview of GST as per Schedule III of the act.
14. Payment to employee (faculty) apart from the salary, a fixed percentage for special event or workshop held or Management development program conducted in the institute.
> The term fixed here predefined that the pay is already fixed as per contractual arrangement and hence it is out of purview of GST as covered under Schedule III Para 1.
15. Life insurance policy for employees
Two cases are there:
Employer directly takes the Policy from third party: It is taxable and also employer is eligible for ITC if it is a statutory obligation.
Employer make reimbursement for the expenses made by employee themselves. Then, the explanation made under reimbursement as above will be applicable here.
Similar is the case of EDLI or any EPF like statutory liability.
Conclusion
After coming across the inclusive list of practical scenario above, it is advisable to analyze every cases in detail to determine the taxability under GST as it has linkage in more than provisions as Schedule I, II and III, Section 7, etc. Further, drafting of Employment agreement should be done in such a way that it covers almost all the practical scenarios covered above to avoid any loss due to GST liability over the entity.
Comprehensive Case study
Mr. Vinod has joined for employment in XYZ ltd. company with CTC of 10 lakhs whose employment term include other perquisite likes uniform allowances, education allowance, traveling allowance, internet allowance, etc. to a max cap of Rs. 40,000 p.a. Loyalty bonus after 5 years of service amounting to Rs. 50,000. Moreover, he stays in an accommodation owned by XYZ ltd specifically aligned for their employees including bus facilities to the company office. For accommodation, XYZ ltd. charges a nominal amount of Rs. 1000 per month. For fooding facility, a canteen operated by MS. Shalimar under contract basis has been arranged for which XYZ ltd. under contract has to pay Rs. 40 per plate. Against the food, no consideration is being charged by employer to employee.
Employees are allowed to go for leave vacation for which reimbursement on actuals are allowed against which Vinod has claimed Rs. 20,000 as reimbursement against invoice raised in the name of XYZ ltd. with its GSTIN mentioned therein. Similar invoice was also raised for reimbursement amounting to Rs. 5,000 for Food reimbursement and Rs. 3,000 for membership of Club. Vinod has taken life insurance for which premium of Rs. 10,000 is being paid, for its family members which as per HR policy of XYZ ltd will be reimbursed on actual bills. Vinod avails facility of bus and accommodation both from XYZ ltd. He is paid monthly salary of Rs. 80,000 in hand after deduction of statutory liability like TDS, PF, etc. After completion of 5 years, he was given a loyalty bonus of Rs. 50,000 as per agreement. He has forwarded a resignation letter on first month after 5 years for which a notice period of 3 months is required to be served. But he has served only 2.5 months, seeing his performance and urgency of his move to other state, XYZ ltd has waived his notice pay for 0.5 months. Calculate the tax liability and ITC in hands of XYZ ltd assuming tax rate to be 18% for sake of simplicity. No bifurcation as to CGST, SGST, IGST is required. Suppose total number of employee is 100.
Solution:
| Transaction | Amount | Whe-ther supply or not | Liable to GST | ITC available | Remarks | Amount of GST | Amount of ITC |
| Allowance | Rs. 40,000 | Not | NO | NO | Schedule III | NIL | NIL |
| Loyalty bonus | Rs. 50,000 | Not | NO | NO | Schedule III | NIL | NIL |
| Accommodation *** | Rs. 1000 | Yes | Exempt | NO | Notf. 14 | NIL | NIL |
| Leave vacation | Rs. 20,000 | Yes | Yes | Blocked credit ((Sec 17(5)(b)(iii) | Rs.3600 | NIL | |
| Food reimbursement | Rs. 5000 | Yes | Yes | Blocked credit ((Sec 17(5)(b)(i) | Rs. 900 | NIL | |
| Contract with Shalimar (40*100*25)25 operating days | Rs. 100,000 | Yes | Yes | No(Sec 17(5)(b)(i) | Rs. 18,000 | NIL | |
| Membership Reimbursement | Rs. 3000 | Yes | Yes | No(Sec 17(5)(b)(ii) | Rs. 540 | Nil | |
| Life insurance premium reimbursement | Rs.10,000 | Yes | Yes | Yes* | Rs. 1800 | Rs.1800 | |
| Monthly salary | Rs. 80,000 | NO | No | NA | Schedule III | NA | NA |
| Notice Pay | Rs.
40,000 |
Yes | Yes** | NA | Outside the scope of Schedule III | Rs.
7200 |
NA |
*it has been assumed that there is statutory obligation for taking insurance of employee. It has further been assumed that the GST invoice is in the name of XYZ ltd and tax on same has been paid by Vinod.
** It comes under purview of Schedule II para 5(e) as described above. Employer and employee are related parties and there is no consideration, so schedule I para II is also attracted here.
*** It has been assumed that the OMV as per Rule 28 is also Rs. 1000.
MCQ based on above case study
1. Had the accommodation charges be Rs. 5000 per month instead of Rs. 1000. Will it be taxable and under which schedule?
a) Taxable, Schedule II
b) Exempt,
c) Not a supply
d) Taxable, Schedule I
Ans: (a)
2. Had the notice pay not be waived off and the employee has served all the period of 3 months?
Will there be any taxability on it?
a) Taxable under Schedule I
b) Taxable
c) No idea
d) Not taxable as under purview of schedule III
Ans: (d)
3. Had the notice pay be not waived off, and paid by the later company in which he is joining. What would be taxability of employer XYZ ltd and new employer both?
a) XYZ ltd: Taxable under Schedule I and New employer: Not taxable under Schedule III
b) Not taxable in both the cases
c) Taxable in both the cases
d) None of the above
Ans: (a)
4. Had the fooding be charged at the rate of Rs. 50 per plate, will it be chargeable to GST?
a) Not taxable
b) Taxable
c) Exempt
d) None of the above
Ans: b) Taxable as profit is also being charged.
5. Same as Q.4, except that the rate per plate is Rs. 40?
a) Not taxable as not a supply
b) Taxable
c) Exempt
d) None of the above
Ans: a) Applying AAR of Tata Motors
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