GST has introduced quite a few concepts which were new or unheard by Indian taxpayers. Few such concepts are levy of tax on stock transfer of goods, taxation of gifts distributed to employees etc. In terms of Section 7 read with schedule I to CGST Act 2017, there are specified activities which would be subject to GST even though there is no consideration in return for such activities / supplies. One such activity is supply of goods/ services to related persons which includes employees and to distinct person which can include branches/ warehouses with separate GSTIN.
After introduction of GST, there were lot of confusion on taxability of perquisites/ gifts to employees. To clear this, press release dated 10th July 2017 was issued by CBIC. It was clarified that gift has not been defined in the GST law and in common parlance, gift is made without consideration and it is voluntary in nature made occasionally. Accordingly, common facilities such housing, gym etc., would not get taxed. Gifts exceeding the value of Rs.50,000/- per annum per employee would get taxed in the hands of employer being supplier of such gift. Even perquisites cannot be levied to tax as services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods or supply of services) being covered in schedule III. When there is no recovery of any amounts from employees, there could not be any GST impact.
GST on supplies
Services by an employee to the employer in the course of or in relation to his employment would not be treated as either supply of goods or supply of services in terms of Schedule III to CGST Act 2017. Therefore, any payments made by an employer to employee in terms of employment contract should not suffer GST. The issue would arise when there are supplies which are made to employees outside the terms of employment for which consideration is received by employer other than in form of ‘employment services. It is important to note that services by an employee to employer is outside the purview of GST and not vice versa. The following types of perquisites provided in pursuance of employment agreement may not be liable to be GST in terms of S. No. 1 of Schedule III:
- Perquisites provided free of charge to all the employees
- Perquisites that are part and parcel of the CTC package agreed with employees
- Perquisites that as per industrial statute obligations, are understood as mandatory upon employer to provide to employee
Free common facilities not taxed
Considering the press release dated 10th July 2017, common facilities provided commonly to employees without any recovery would not be subject to GST as they cannot be considered as gifts:
- Telephone / mobile services
- Internet services
- Education reimbursement for employees’ children
- Transport facilities
- Membership of gym, health club etc.
- Subscription to journals
- Canteen facilities
- Coffee / tea and other beverages during office hours
- Training facilities
- Parking services
- Insurance for self and family
- Uniform including shoes
- Joining bonus
- Access to furniture and other infrastructure
- Office tours / trips
The list may cover all such common facilities for which there is no recovery from employees.
GST when recoveries made
It may so happen that for some of the facilities provided, employers recover amount from the employees. Such recoveries could be concessional. For example, Rs.5 recovered from employee for a meal actually costing Rs.50. Question which arises here is if, Rs.5 recovered is subject to GST or not. Insurance, telephone, transportation and housing facilities provided at concessional rates could be other examples.
GST law being in nascent stage, there are many issues for which finding actual solution may not be an easy task. Reference to European VAT laws which has inspired Indian GST law could give us some idea on interpreting few provisions. The judgment of European Court of Justice (ECJ) delivered its judgment in Astra Zeneca UK Limited v HMRC (Case C-40/09) could be of relevant here. In this case, the court held that partial salary sacrifices by employee towards the vouchers issued by employer is consideration giving rise to VAT. When there is recovery of any amount from employees towards any supplies (unless exempted), such supplies could be treated as supply by revenue department.
Valuation for payment of GST
The transaction between employee and employer is treated as related party transaction and therefore, transaction value would not be applicable for levy of GST. Rule 28 of CGST Rules 2017 would be applied for valuation of supply when the transaction is between related parties. According to Rule 28, the value of supply which should be considered by employer on recoveries from employees should be as below:
a) open market value
b) if open market value not available, value of like kind or quality goods or services
c) if value is not determinable according to a) or b) above, then cost of services + 10% or residual method should be adopted.
Open market value could be adopted which could be value paid by the employer to the original supplier. Considering earlier example, the value on which GST payable by employer could be Rs.50 though only Rs.5 being recovered from employees.
The press release dated 10 July 2017 stressed on the fact where perquisites i.e. non-monetary emoluments [in terms of the CTC or made available free of charge] to employees are not taxable. This analogy may be borrowed for all non-monetary benefits also which are given as consideration in the employment agreement.
The Hon’ble Andhra Pradesh High Court in case of Bhimas Hotels Pvt. Ltd. vs UOI in the context of Service Tax Law had an occasion to rule upon whether the supplied by an employer to the workers at subsidized rate, would come within the purview of service tax. The Hon’ble Court observed that any supply of subsidized food to the workers by the management of a company, has to be seen as part of the pay package that the workers have negotiated with the employer. The Court relied upon the definition of the wages given in Industrial Dispute Act, 1947, which includes “the value of any service or of any concessional supply of food-grains or other articles”, to hold that food supplied by the employer to its employee at subsidized rate forms part of the wages. Once the activity is in the form of supply of food to its workers at a subsidized rate is understood to be part of their industrial obligation, it is inconceivable that the same can be construed as any taxable service. The Court also took note of the fact that the petitioner had discharged VAT on the sale of goods to employees.
A view is possible that facilities provided at concessional rates may not be subject to GST as well as they may be treated as part of consideration for employment. However, in Advance ruling in Kerala – AAR of Caltech Polymers Limited, it was held that the recovery of nominal amount from employees towards food is includible in the definition of outward supply u/s 2(31). Thus, chargeable to GST at open market value. It didn’t appreciate the ruling of Andhra Pradesh High Court on the ground that decision was based on dual taxability of food under service tax and VAT and since there is no such issue of dual taxability under GST, then the ruling is not applicable. Though the AAAR has not appreciated the judgment in entirety and didn’t distinguished on the material aspect viz. food being supplied forming part of the wages, therefore may not be considered as good on merits.
It may be still be possible to contest that that providing facilities such as canteen food or transportation at subsidized rate of employee in terms of the overall pay package agreed with the employees would not be liable to GST in terms of S. No. 1 of Schedule III. In the considered view of the authors, providing food at Rs.5 (where the cost is Rs. 50) to employees may not be considered as taxable supply and hence no GST to be discharged. However, this view maybe disputed by the department.
As a best practice, it would be safe to add appropriate terms of making availability of facilities such as canteen, transportation & insurance facility in the employment agreement as to establish the nexus between supplies/benefits at subsidized rate and the employment arrangement in case of issue arises.
Input tax credit
As per exceptions to the Section 17(5) restriction on ITC, where it is obligatory for an employer to provide specified goods or services (such as canteen facility/ cab service/ insurance) to employees under any law for the time being in force, then ITC of such goods or services would be eligible.
If the amount of recovery is very less, then it is wise to undertake cost benefit analysis for the taxpayer before deciding on recovering any amounts. Consider following example for canteen service where having canteen is statutory requirement and Rs.5 being recovered from employees:
|
Cost of meal (Rs.) |
GST by vendor @ 5% (Rs.) |
Partial recovery amount (Rs.) |
|
90 |
4.5 |
5 |
In this case, it is better not to recover any amount as credit of Rs.4.5 is eligible as against ITC of Rs.5 wherein there would be no dispute. If view is taken not to pay based on the earlier discussion, then such ITC may also be disputed. This is because if GST payment is opted at 5% (presently), then no ITC is eligible.
Notice pay recovery
Notice pay recovery is very common in entities where amounts are recovered when employee does not serve in the notice period. Taxation of such amounts is in question from service tax regime. The major view is that such recovery is towards tolerating the act or a situation by the employer which was considered as declared service in service tax. With the introduction of GST & before recent amendment in the definition of supply, there was similar interpretation to the levy of GST on the notice pay recovery as entries of Schedule II were covered within ambit of supply. Post amendment, the levy of GST on notice pay recovery depends upon the test of supply. In case of notice pay, there would be no positive act of supply of service by company to employee leaving the organisation. It is merely the recovery of compensation from the employee on account of their failure to fulfil the terms of contact which would be in the form of liquidated damages. Liquidated damage could be understood as compensation payable by the supplier for the loss or injury suffered by the recipient for the non-performance/ delay in performance. Payment of damages is a condition of contact & it is not a consideration for any supply
It is very interesting to note that UK VAT law which is very close to our GST law does not levy tax on termination of contract subject to condition that the contract originally contains a clause allowing the parties to terminate early in lieu of compensation for losses arising from termination. However, levy could get attracted where no such clause exists in original agreement, and separate agreement reached to terminate. There are few rulings of courts with respect to levy of service tax which can be considered to contest the levy, if any. Few are discussed in subsequent paragraphs which may be relevant for GST law as well.
- In case of M/s.Gujarat State Fertilizers & Chemical Ltd (2016), it was held that the cessation of employment should also be treated as employment service not liable for service tax.
- Also very recently, in case of M/s. HCL Learning Systems Vs CCE, Noida (service tax appeal no. 70580 of 2018) the Allahabad CESTAT has held (in November 2019) that when amounts are recovered out of salary already paid, such amounts would not be subject to service tax as salaries are not subject to tax.
- In case of M/S. GE T & D India Limited 2020-VIL-39-MAD-ST (dated 7/11/2019), the Hon, High Court of Madras has held that service tax is not payable as such amounts are not towards any particular service being rendered, rather are compensatory in nature.
Thus, from the above discussion it can be inferred that the notice pay recovery paid by the employee in default to compensate employer for non-fulfilment of the condition stipulated in the agreement & the same cannot be regarded as supply for consideration. Therefore, GST would not be to be leviable on the same.
Conclusion
GST council is taking all necessary measures to simply the law though introduction of GST was not planned well. Failure of IT infrastructure also added to the injuries of tax payer. There have been numerous press releases, tweets, circulars to clarify and clear the confusion. There have been few advance rulings as well which are adding to the confusion. In few rulings, canteen recoveries are held as taxable whereas recoveries towards insurance amounts held as not liable for GST. It is time to clarify issues by the board as to taxability of employee recoveries.
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