AAR: No GST Charges on Amount Recovered from Outgoing Employees

No GST shall be subjected to be applied on the notice pay recovery via outgoing employee, Haryana Authority for Advance Ruling (AAR), witnessed.

Under the aegis of Indian Railways, RITES Limited is a Government of India company. RITES Limited is incorporated in India as a Public Limited Company beneath the Companies Act, 1956, and is controlled via a Board of Directors that consists of persons of eminence from various sectors of engineering and management.

When the Applicant firm hires a new employee, it enters into an employment contract with that person. Employees (other than contractual employees) have an employment agreement that says that if an employee resigns from the firm, he or she must serve the minimum notice time specified in the agreement.

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Nevertheless, if the employee is unable to serve the necessary notice time, the Applicant firm recovers an amount as Notice Pay or deducts the said amount from the employee’s pay in place of the notice period that the said exiting employee did not serve. It is the type of restitution for a violation of the conditions of the Employment Agreement.

The Authority must decide whether the sum collected by the Applicant firm as Notice Pay Recovery from the departing employee is taxable under GST legislation, and if so, at what GST rate.

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The Two-Member Bench that comprises Sunder Lal, Member CGST, and Kumud Singh, Member SGST sees that “CGST Act, 2017. Notice pay does not result in the provision of service by either party, it is a sort of compensation either to the employee or employer and not a consideration. It is a safety valve sort of option to both parties i.e. if one of the parties frustrates the employment contract either by reneging or by failing to perform. It is the employee who is the service provider and the service supplied by him in the course of his employment is excluded from the definition of Supply under the GST Act.”

The Court ended by observing that the sum recovered as Notice Pay Recovery from the departing employee is GST-free.