The notice pay recovery should be exempt from GST or not – it has been a longstanding issue and needs clarification from concerned authorities.
Planning to leave your job without serving the stipulated notice period? It might cost you 18% goods and services tax (GST) on the pay recovered for the notice period duration.
Yes, the Gujarat Authority of Advance Ruling (GAAR) has held that an employee exiting a company without serving the mandatory notice period would be liable to pay 18% GST on the recovery of his or her pay.
The new ruling was mandated during the hearing of a case where an employee of the Ahmedabad-based export company Amneal Pharmaceuticals sought advance ruling on the issue of exit from his job without serving the stipulated three-month notice period.
The authority has termed the mandate as “tolerating an act”. It also said that recovery of the amount would be in lieu of “breach in serving stipulated notice period”.
As the authority has also said, the transaction would not be covered under the exemption provided to the employer-employee relationship under the GST Act. “We hold that the applicant is liable to pay GST at 18% under the entry of services not elsewhere classified, on the recovery of notice pay from the employees who are leaving the company without completing the notice period as specified in the appointment letter issued as per the contract entered between them,” the GAAR further said in the order.
Under the employment transactions, an employee offers his or her services to the employer who provides a salary plus other non-monetary benefits. Therefore, at both ends, there is supply. According to some experts, the amount should be taxable under the goods and services tax rule as both ways; it is the supply of services.
Here is the treatment of GST on employee remuneration and notice pay recovery in a nutshell.
What is notice pay recovery?
Whenever an employee joins or leaves a company or organisation, he or she is bound by the terms and conditions of employment. An employee is usually required to serve the stipulated notice period before he or she resigns. While a majority of the employees follow this rule, in some cases, there are exceptions reported.
In several employee agreements between the employee and the organisation employing him or her, have a clause that states that if the employee wants to leave the company without serving the notice period, then he or she is required to pay an amount equal to the unserved notice period to the company. This amount is called notice pay recovery. This is either recovered from the employee or deducted from the salary payable to him or her.
GST on employee remuneration
According to the CGST Act, all kinds of supply of goods and services attract goods and services tax. While it applies to an amount made by a registered taxable person for consideration and in the course of furtherance of business, the 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.
Section 15 of the CGST Act states that the employer and employee are deemed to be related persons. Hence, supply made by an employer to an employee is liable to draw goods and services tax even if it is made without consideration.
On the other hand, Schedule III of the CGST Act states that services provided by an employee to the employer in the course of employment are not considered as supply of goods or services. Hence, GST does not apply to employee remuneration.
GST on notice pay recovery
The employment services are exempted from goods and services tax. Hence, some professionals claim that as notice pay recovery is in the course of employment, the same is also exempt from the tax. However, it should be noted that Schedule II of the CGST Act states the certain types of activities 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.
There are different points of view regarding the application of GST on notice pay recovery.
Some say that employees receive 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. Hence, goods and services tax is applicable to notice pay recovery.
Others opine that in case the notice pay policy does not contain such agreement for tolerating the act of an employee, notice pay recoveries should not be subject to GST.
So far, this has been a longstanding issue and needs clarification from the GST authorities.
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