Under the employment transactions, an employee offers services, and the employer provides a salary plus other non-monetary benefits (perquisites). So, at both ends, there is supply, and thus the same should be taxable under GST. In this article, let us understand in detail the treatment of GST on employee remuneration and notice pay recovery.
1. What is Notice Pay Recovery?
Whenever an employee joins or leaves an organisation, he/she is bound by the terms of employment. An employee is usually required to serve the agreed notice period before he/she resigns. But, most of the employee agreements have a clause stating that if an employee wants to leave the company without serving the agreed notice period, then he is required to pay an amount equal to the unserved notice period. This is called notice pay recovery, which is either recovered from the employee or deducted from the salary payable to him.
2. Treatment of GST on Employee Remuneration
Under the CGST Act, all supply of goods and services attracts GST. It applies to an amount made by a registered taxable person for consideration and in the course of furtherance of business. However, Schedule I of the CGST Act includes transactions treated as supplies even if it is made without consideration between related parties but is made in the course of furtherance of business. Also, Section 15 of the CGST Act states that the employer and employee are deemed to be related persons. Thus, supply made by an employer to an employee is liable to GST even if it is made without consideration (except gifts up to Rs. 50,000).
However, Schedule III of the CGST Act states that ‘services by an employee to the employer in the course of or concerning his employment’ are not considered as supply of goods or services. So, GST does not apply to employee remuneration.
3. Applicability of GST on Notice Pay Recovery
As discussed above, employment services are exempted from GST. Thus, some professionals are of the view that as notice pay recovery is in the course of employment, the same is also exempt from GST. But, it should be noted that Schedule II of the CGST Act states certain activities that shall be treated as a supply of goods or services. Such activities include ‘Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation’.
To this, there can be a different point of views:
- It could be contended that an employee receives the notice period pay for not serving the notice period prescribed by the employer. The action of not serving the notice period leads to tolerating the act of an employer. Thus, GST is applicable to notice pay recovery.
- In case the notice pay policy does not contain such agreement for tolerating the act of an employee. Then, such notice pay recoveries are not subject to GST.
This is a long-pending issue and needs clarification from the GST authorities. Taxpayers can make representations to seek clarification, as this is a prevalent issue.
There are also a few crucial decisions made in favour of the assessees stating that such notice pay recoveries are not subject to GST:
- Order of Commissioner (Appeals) in case of M/s.Gujarat State Fertilisers & Chemical Ltd – It held that cessation of employment is treated as employment service not liable for the GST.
- Allahabad CESTAT in case of M/s. HCL Learning Systems Vs CCE, Noida – It held that the amount recovered out of salary already paid is not subject to GST.