GST Applicability on Employee Recoveries – AAR Maharashtra
by ReinHeads Team | Jan 12, 2022
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AAR Maharashtra – GST Applicability on Employee Recoveries
- Emcure Pharmaceuticals Ltd. (‘the Applicant’) provides canteen and bus transportation facility to its employees as part and parcel of the employment agreement
- The Applicant has engaged third party service providers to provide the said facilities, who raises invoice with applicable GST on the Applicant. The Applicant further recovers such amount (paid to service provider) from its employees at subsidized rate
- In cases, where an employee resign and leave the employment without serving the mandated notice period, the Applicant is entitled to monetary compensation (‘notice pay recovery’). In such cases, the Applicant deducts salary for the tenure of notice period not served as a breach of terms of employment agreement.
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| Issues before the Authority for Advance Ruling (‘AAR’) |
- Whether GST would be payable on recoveries made from the employees towards providing canteen facility at subsidized rate in the canteen and office?
- Whether the GST would be payable on the recoveries made from the employees towards providing bus transportation facility?
- Whether the GST would be payable on the notice pay recoveries made from the employees on account of not serving the full notice period?
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| Discussion & Ruling |
| A. On recovery from employees towards canteen facility and transportation facility
The AAR ruled that the GST would not be leviable on recoveries made from the employees towards canteen facility and transportation facility as the same does not constitute ‘supply’ under Section 7 of the Central Goods and Service Tax Act, 2017 (‘CGST Act’) on account of the following reasons:
- Section 7 of the CGST Act provides that for a transaction to qualify as a “supply” it should essentially be made in course or furtherance of business. However, the provision of canteen facility and transportation facility provided by the Applicant to its employees is a welfare measure and not connected to the functioning of the business of the Applicant
- Provision of said facilities are not the transactions made in the course or furtherance of business. Further, the said facilities are provided by the third-party vendors and not by the Applicant.
B. On notice pay recovery amount from the employees on account of not serving the full notice period
The AAR ruled that the GST would not be leviable on notice pay recovery amount on account of not serving the full notice period as the same does not constitute ‘supply’ under Section 7 of the CGST Act on account of the following reasons:
- Clause 5(e) of Schedule II of the CGST Act provides that agreeing to the obligation to refrain from an act or tolerate an act or a situation or to do an act is supply of service. However, by virtue of the insertion of Section 7(1A), Schedule II is applicable only if an activity first qualifies as ‘supply’ under Section 7 (1) of the CGST Act
- In case of notice pay recovery amount, the employee opting to resign by paying an equivalent amount in lieu of waiver of the full notice period has acted in accordance with the contract and therefore no question of forbearance or tolerance arise. There is neither any activity nor any passive role played by the employer
- In absence of any consideration flowing from an act of forbearance in as much as there is no breach of contract.
*Advance Ruling No. 119/2019-20/B-03 dated 04 January 2022 (The Authority for Advance Ruling, Maharashtra) |
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