GST is applicable on Notice Pay Recovery from Employees – AAR Gujarat
by ReinHeads Team | Jan 15, 2021
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AAR Gujarat* – GST is applicable on Notice Pay Recovery from Employees
| Facts |
- M/s Amneal Pharmaceuticals Pvt. Ltd (‘the Applicant’) is engaged in manufacturing of pharmaceuticals products
- The Applicant enters into a contract with employees by issuing an “Appointment Letter” which stipulates that either parties shall serve a three months mandatory notice to terminate the contract
- If any employee doesn’t serve the notice period after tendering the resignation, as per the Appointment Letter, the Applicant is entitled to recover the ‘Notice Pay’ from the agreed portion of salary to compensate the loss
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| Issue before the AAR |
- Whether the Applicant is liable to pay GST on recovery of Notice Pay from the employees who are leaving the organisation without completing the notice period (specified in the Appointment Letter, agreed between Employer and the Employee)?
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| Discussion and Findings of the AAR |
- Section 7(1) of the Central Goods and Service Tax Act, 2017 (‘CGST Act, 2017) includes activities referred in Schedule II in the scope of supply. Clause 5(e) to Schedule II stipulates ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’ shall be treated as supply of service
- Notice Pay is a sum mutually agreed between the employer and the employee for breach of contract. It can be regarded as a consideration to the employer for ‘tolerating an act’ of the employee to not serve the notice period, which was an agreed contractual obligation of the employee
- The employee has understood and accepted the condition that in the contingency of his inability to provide the prescribed notice period, he can exercise the option of paying the Notice Pay as the consideration to not serve the notice period
- The employer is bound to release the employee after recovery of Notice Pay amount as it is part of the terms and conditions agreed to and settled between them
- Therefore, the employer agreeing to the obligation of tolerating an act (i.e. quitting without any advance notice on the part of the employee on payment of notice pay), will be covered under Clause 5(e) to Schedule II to CGST Act 2017, as a declared service
- Based on above, the AAR held that the Applicant is liable to pay GST @ 18% on recovery of Notice Pay from the employees who are leaving without completing the notice period (specified in the Appointment Letter).
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*Advance Ruling No. GUJ/GAAR/R/51/2020 dated 30 July 2020 (The Authority for Advance Ruling, Gujarat) |
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