The broad conditions required for the applicability of GST as contained in section 7 of CGST Act 2017 and corresponding section in various state acts and IGST Act are:-

1. There must be supply (sale, transfer, barter, exchange, lease, rental, license or disposal ) of goods or services or both (Goods are defined to include every movable property except money and securities and services on the other hand is defined as everything other than goods, money and securities)

2. There must be presence of consideration (may be in money or otherwise to be valued as per valuation principles)

3. The supply must be in the course or furtherance of business (business is defined to include amongst other, the ancillary and incidental activities)

Let us analyze the transactions between employer and employee based on the conditions prescribed above.

Case I: Supply of goods or services or both when the supplier is employee and recipient is employer

The typical category of supplies which should fall in the above case is employment services rendered by employee (supplier) to employer (recipient) against which employee receives remuneration in cash or kind (typically in the form of salary).

It is clear from the above paragraph, that all the three broad conditions required for the chargeability of GST (is present, viz presence of supply (employment service), existence of consideration (remuneration) and the supply is in the course or furtherance of business of the employee. Therefore, in general circumstances GST is applicable  on employment services provided by employee to employer

The saving grace comes in the form of exclusion contained in Schedule III of the CGST Act, 2017 which provides that any services rendered by an employee to employer in the course of or in relation to his employment shall neither be treated as supply of goods nor as supply of services.

This exclusion has given relief to the entire gamut of employee services. However, it is pertinent to note that the exclusion is applicable only in circumstances where the services are rendered in the course of or in relation to his employment and not otherwise. Any service rendered by employee to his employer beyond the normal course of employment can be subject to GST unless otherwise exempted

This brings us to a very important aspect about the drafting of the employee agreement/contract. The fact that any services are rendered in the course of or in relation to employment can be established through a well-articulated agreement. Any employee agreement, therefore, should have comprehensive details about the roles and responsibilities of the employee and remuneration against  those services. The effort should be made to also incorporate all the employee benefits including perquisites like club membership, residential dwellings etc rendered against the services so as to reduce the probability of existence of any assumed relationship beyond the course of employment.

Case II: Supply of goods or services or both when the supplier is employer and recipient is employee

The employer in the course of engagement with employee provides multiple goods and services. These goods and services are given as consideration against employee services, for the welfare of the employees or as means and aids required for business functions.

An illustrative list of goods and services supplied by the employer  to employee is produced below.

(i) Money against the  employment services

This normally constitutes the highest proportion amongst the bouquet of goods and services provided/rendered to employee against his services. This supply however satisfies only two out of three conditions mentioned above. Though it has quid pro quo (employee services) and given in the course of business only, but since the definition of goods or services explicitly excludes money, it does not satisfy the first condition viz. supply of goods or services and hence cannot be subjected to applicability of GST.

(ii) Goods or services in Kind for consideration-

 Sometimes the employer provides certain services such as telephone, rent-a-cab, meal etc or goods like mobile phones, uniforms and deducts charges against such services or goods from the salaries/remuneration of the employee. The presence of supply cannot be argued against all the conditions but for whether such goods or services are provided in the course or furtherance of business.

 The phrase ‘ in the course or furtherance of business’ has not been defined in the Act. The meaning that can be derived from this phrase is so wide that it can include every activity undertaken by a business concern, including activities in the course of employment, since employment is a subset of the activities undertaken in the course of business.

The definition of business as under section 2 (17)

“business” includes––

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;

(f) admission, for a consideration, of persons to any premises;

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

(h) services provided by a race club by way of totalisator or a licence to book maker in such club ; and

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

The definition of business  especially clause b is all encompassing  and covers an entire gamut of activities that can be established to be integral part  of  business  and   therefore  be made chargeable to GST provided remaining conditions are fulfilled.

Thus despite the fact that the employer  may not be in the business of rendering rent-a-cab services or selling uniform but since these activities are ancillary to the principle business, the condition of in the course or furtherance is invoked along with other conditions and employer becomes liable to charge GST on these supplies.

 Similar view has been taken in a recent advance ruling by Authority of Advance ruling-Kerala, where the authority asked the applicant to charge GST on the meal/canteen services provided by the applicant to the employees as the canteen services rendered by the applicant is in extension to the principle business of manufacturing and sale of footwear. The decision of the order though can be challenged at the appellate authority but  the applicant  is unlikely  to get respite  on  the  ground that canteen services is not part of the business of the applicant.

Now having established that the GST will be applicable on such supplies, the next important question is the value on which GST will be applicable. As per the relevant provisions related to valuation, such supplies may be subjected to open market value in light of the transaction between related persons  (employee and employer are related persons by virtue of Section 15 of CGST Act)

(iii) Goods or services in Kind without consideration

A classic example of  this  category is free gifts such as on the occasion of festivals, at the time of resignation, promotions etc. This however will be subject to GST as Schedule I of the CGST Act, 2017 mandates such transaction to be supply irrespective of the absence of consideration  (value to be

determined at open market value). This schedule  gives an exception for gifts upto INR 50K per employee to be outside the ambit of supply.

An interesting point to note over here is that any sought of monetary (pure in money) gift is outside that the scope of supply  as money is excluded from the definition of goods. Does that mean the employer should avoid any sort of assistance or perquisites in form other than money to avoid implications  of GST. The employer may have the option to provide such facilities in the form of allowances but a careful consideration of income tax provisions has to be kept in mind.

An illustrative list of other transactions/supplies by an employer to employee which may be made applicable to GST subject to the provisions of GST.

(i) Perquisites such as free residential dwelling, motor vehicle along with driver salary

(ii) Insurance premiums, medical and free hospitalization facilities

(iii) Membership of clubs, fitness center, parlors, beauty treatment etc.

(iv) Sponsorship of employee vacations/office trips/ dinner outings/trainings and seminars

Position prior to GST

In erstwhile provisions of Service tax,the supplies from employer to employee were taxable unless specific exemption given (For instance canteen facilities were exempted via  Mega exemption Notification dated 20/06/2012). For services where consideration was not involved, the service tax provisions were not applicable.

Conclusion

On careful analysis of the above transactions it is sure that these transactions especially supplies from employer to employee may become prone to litigations for lack of clarity on issues like what kind of and in  what circumstances the supplies be made taxable. For instance where rent-a-cab service is provided to employees in night shift is essential and stipulated by the law and therefore these supplies should not be made part of taxable supplies. Another example of cases where residential accommodation is provided to employees at plants is also necessity and required for the business operations. The authorities should address these issues and provide clarity to avoid potential litigations.

The other connected issues which should be addressed includes

(i) Applicability of reverse charge mechanism on employee reimbursements in light of section 9(4) of the CGST Act (presently deferred till 30th June 2018)

(ii) Input tax credit claims on services like membership of club, health and fitness center in cases where these supplies from employer to employee are made taxable (in lieu of legal provisions and rationale of the advance ruling produced above), as the present provisions absolutely prohibits credit on such items.

Ashish Agrawal Deepak Bansal

More Under Goods and Services Tax

One Comment

  1. ATUL KAKKAD says:

    Dear Sir thank you for the elaborative article. Now if company pays salary to the director of the company and CEO of company than what will be the implications. Whether it will attract GST on Reverse charge or otherwise?

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