Introduction
GST is applicable on “supply” of goods and services. As per GST laws, supply is inclusive of all sale, transfer, exchange, barter, license, rental, lease or disposal – made for consideration and shall be in course or furtherance of business. Supply can be from employee to the employer or from employer to its employees. Any supplies made by an employer to its employees will be taxed in GST.
Gifts
The term ‘gift’ means the transfer by one person to another of any existing movable or immovable property, voluntarily and without consideration in money or money’s worth. Gifts up to a value of Rs 50,000/- per year by an employer to his employee are outside the ambit of GST. However, gifts of value more than Rs 50,000/- made without consideration are subject to GST, when made in the course or furtherance of business.
The question arises as to what constitutes a gift. Gift has not been defined in the GST law. In common parlance, gift is made without consideration, is voluntary in nature and is made occasionally. It cannot be demanded as a matter of right by the employee and the employee cannot move a court of law for obtaining a gift.
However, any cash payment made by an employer to an employee on any occasion shall be treated as an ex-gratia payment and not gift.
Perquisites
A perquisite is a non-cash benefit granted by an employer to its employee. Under the Income Tax Act, a perquisite is defined as a benefit which an employee avails of or is entitled to on account of the employee’s job or position in the enterprise. It is pertinent to point out here that the 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). It follows therefrom that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee will not be subjected to GST.
Free Common Facilities Not Taxed
Common facilities provided commonly to employees without any recovery would not be subject to GST as they cannot be considered as gifts, provided they form part of contractual agreement.
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
Access to furniture and other infrastructure
Office tours / trips
Applicability of GST on Notice Pay Recovery
Employment services are exempted from GST. Therefore, there is one school of thought 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 different points of view:
It could be contended that an employer receives the notice period pay from the employee 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 employee of non-service of notice period. Thus, GST is applicable to notice pay recovery.
In the erstwhile regime, there were crucial decisions made in favour of the assessees stating that such notice pay recoveries are not subject to service tax:
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 service tax.
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 service tax.
Under GST regime there are no such case references, however AAR Gujarat in the matter of Amneal Pharmaceuticals (P.) Ltd. has observed that where a company, at time of appointing any employee, clearly mentioned in appointment letter that his services can be terminated by giving notice or notice pay in lieu of notice period from either side, the company shall be liable to pay GST on recovery of notice pay from employees who are leaving company without completing notice period as specified in appointment letter.
The company shall be liable to pay GST @ 18% under the entry of “services not elsewhere classified”, on 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.
Conclusion: Recovery of notice pay dues of employee/payment of notice by the employees who are unable to serve the notice period as per their appointment letter/contractual agreement will attract GST.
Allowances vs. Reimbursements on Actuals
Allowances like Transport Allowance, Uniform Allowance etc. are part of the employment contract. These are considerations for service provided by employee to employer and not supplies by the employer and hence the same will not be liable to GST.
With respect to reimbursements, employee has incurred costs which are expected to be reimbursed by the employer since the costs have been incurred on the behalf and at the instance of the employer. The employee will be able to claim reimbursement of the expenses based on the invoices received from the vendors and input of GST may be availed by the employer where his GSTIN is provided. Where expenses are incurred by an employee on behalf of his employer, then the employee shall provide his employer’s GSTIN and other relevant details for availing ITC of GST subject to provisions of the Act.
ITC on Festival Gifts
A taxpayer shall be eligible to claim input tax credit on the gifts purchased by it and distributed to persons related to business but there shall be no ITC with respect to the sweets and other eatables purchased for distribution to workers/employees or any gifts distributed to the employees by the employer.
List of Relevant Blocked Credit in Context of Employee Costs
For Motor Vehicle Having Approved Seating Capacity of Not More Than 13 Including Driver
ITC on motor vehicle would be admissible in following cases:
When used for the purpose specified – onward supply of vehicle / supply of transport of passengers / training services on motor vehicle driving.
ITC on leasing, renting or hiring of such motor vehicles for transport of persons is available as follows:
When used for the purpose specified – onward supply of vehicle / supply of transport of passengers / training services of motor vehicle driving.
Where inward supply of such service is used by the registered person for making an outward taxable supply of same category of goods or services / or as an element of a taxable composite or mixed supply.
Where it is obligatory for an employer to provide such services to its employees under any law for time being in force.
Credit on general insurance / repairs / maintenance in respect of such motor vehicles as follows:
When used for specified purposes given above – onward supply of vehicle / supply of transport of passengers / training services on motor vehicle driving.
For motor vehicle with approved seating capacity of more than 13 persons, no restrictions on availing vehicle related credit.
The Credit is Restricted on Certain Goods and Services
Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, life insurance and health insurance:
Input tax credit in respect of such goods or services or both shall be available where:An inward supply is used for making an outward taxable supply of the same category or as an element of a taxable composite or mixed supply.
When obligatory for an employer to provide such services to its employees under any law for the time being in force.
Membership of a club, health and fitness centre, travel benefits extended to employees on vacation such as leave or home travel concession:
Input tax credit shall be available where it is obligatory for an employer to provide to its employees under any law for the time being in force.The credit on goods/services, when used for personal consumption, is restricted.
Employer shall be entitled to avail ITC in respect of all inputs like medicines, equipment, furniture, etc. consumed in hospitals and input services like maintenance and upkeep of hospitals, etc., to provide health services to its employees and their dependents as per terms of Ordnance Factory Medical Regulation (AAAR Maharashtra in the matter of Ordnance Factory).
Eligibility to Credit on Specific Commonly Incurred Expenses
Credit of tax paid on uniforms/safety shoes/protective head gear/helmets:
These are used by the employees of company, in course of business. These could be worn on shop floor as protection for employees when engaged in different manufacturing activities or processes / against heat / cold / dust particles etc. The employer would be eligible to such credit.Telephone/mobile expense:
The credit is eligible when used in course of business. However, department may deny whole/part alleging personal use by employee. A reasonable portion may be reversed for personal use [based on past experience] to ensure such objections to credit availed are not raised at time of audit.Similarly held in CCE, Goa vs Hindustan Coca Cola (P.) Ltd. (March 10, 2015).
Air travel by company directors/employees:
Expenditure incurred on air travel by employees/directors of the company for official purpose is eligible for credit subject to proper documentary evidence.Similarly held in CCE vs Fine Care Biosystems (2009 (244) ELT 372 (CESTAT) and Goodluck Steel Tubes Ltd. Vs C. C. Ex., Noida 2013 (32) S.T.R. 123 (Tri. – Del.).
Lodging/Boarding:
The input tax credit on hotel rent for employees/executives for business and client meetings is directly relatable to assessee’s business. Therefore, credit could be admissible.Similarly held in One Advertising & Communication Services Ltd. vs C.S.T., Ahmedabad (2012 (27) S.T.R. 344 (Tri. – Ahmd.).
Adverse Rulings on Certain Credits
National Aluminium Company Ltd Advance Ruling Order No. 02/ODISHA-AAR/18-19 dated 28th September, 2018:
Issue – Whether the applicant is entitled to take input credit of tax paid on various goods and services used for maintenance of applicant’s townships, guest houses, hospitals and horticulture for paying output tax.Held that service by way of residential accommodation in the colonies or otherwise is a perquisite which has been clarified as not chargeable to GST implying thereby any perquisite including residential accommodation is an exempt supply.
The inward supplies received by way of management, repair, renovation, alteration or maintenance service or goods received for furnishing the residential colony shall not qualify for input tax credit in terms of Section 17 (2) of the OGST/CGST Act.
Services clearly in relation to the residential colony shall not qualify for input tax credit.
AAAR_Odisha upheld the decision of AAR_Odisha.
Posco India Pune Processing Center Pvt Ltd (2019-TIOL-25-AAR-GST):
Issue – Credit eligibility for hotel used as a residential accommodation by the MD/GM.Held that the same is used for their personal consumption. Providing residential accommodation in a hotel is not in furtherance of the applicant’s business.
Since the accommodation is used for personal comfort, in view of Section 17(5)(g) of the CGST Act, applicant is not eligible to claim the ITC.
Outdoor Catering
When outdoor catering services are given for providing food to staff, the facility is provided because of statutory obligation imposed under Section 46 of the Factories Act, 1948 and it becomes a condition of service for employees. Credit shall be made available on such expense.
Accordingly held in Stanzen Toyotetsu India Pvt. Ltd. vs. C. C. Ex., Bangalore-III 2009 (14) S.T.R. 316 (Tri. – Bang.), affirmed in 2011 (23) STR 444 (Karnataka High Court) – Credit available.
It can thus be concluded that credit could be available when food/drink facility is given in discharge of obligation under law, but may be disputed by the Department.
Employee Accident Insurance
As it is not health/life insurance, the credit could be eligible. There is no policy for health and accident together. Accident insurance is necessary for the company to provide to employees and is in furtherance of business.
In Milipore India Ltd Vs CCE Bangalore –II (2009 (236) ELT 145 (Tri-Bang.), affirmed in 2012 (26) STR 514 (Karnataka High Court), it was held there was no restriction on availment of such insurance credit.
Department may dispute that accident insurance may be covered under the Insurance Act within health. Risk – if denied, then credit reversal could be subjected to 24% interest.
Practical Tip: When the company takes a call to avail such credit, intimate the department by RPAD letter, plan to avail and seek confirmation on eligibility to such credit. If objected, reverse under protest with a letter setting out why it is available. The decisions referred above under erstwhile laws have persuasive value under GST as well.
Eligibility to Credit When Recoveries Made from Employees Towards Canteen/Cab/Insurance
When recovery done towards canteen facility:
Taxable at 18%/12% from 1.7.2017 to 14.11.2017 (with ITC) and at 5% (without ITC) post that date.
Tax to be paid on valuation as per Rule 28 of GST Rules – on open market value, cost plus 10%, or based on contractor invoice.
Questionable whether credit should be restricted via Notification No. 11/2017-CT (Rate) when output GST is paid at 5%.
Recovery done for employee transport facility:
Taxable at 5% from 1.7.2017 to 13.10.2017 (without ITC) and at 5% (with ITC) post 13.10.2017.
Tax valuation as per Rule 28 of GST Rules.
GST on Director’s Remuneration
Definition:
Directors’ remuneration refers to compensation the company gives to its directors for the services rendered. This can be through fees, salary or by use of a company’s assets.
CBIC Clarification (Circular No. 140/2020 dated 10th June 2020):
Services by an employee to the employer under an employment agreement → Not a supply under GST → No GST.
If not employer-employee relationship → GST applicable under Reverse Charge Mechanism (RCM).
Non-Executive Directors
Not involved in day-to-day working.
Relationship is “Contract for Service” – TDS under Section 194J applicable.
GST @ 18% under RCM.
Independent Directors
No direct relationship with the company.
Give expert advice but do not participate in daily operations.
GST @ 18% under RCM.
Whole-Time Directors
If employee:
Contract of Service – employer-employee relation.
TDS under Section 192 on salary.
Accounted under “Salaries” in books.
No GST.
If not employee:
Contract for Service – professional services.
TDS under Section 194J.
Accounted separately from “Salaries.”
GST @ 18% under RCM.
Valuation for Payment of GST
Where transactions between employer and employees without consideration are considered as supply (Schedule I), they are treated as related-party transactions. Rule 28 of CGST Rules 2017 applies:
Open market value.
If not available – value of like kind/quality.
If still not determinable – cost + 10% or residual method.
Open market value could be the value paid by the employer to the original supplier. Tax is applied at the rate applicable to the nature of supply.