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.

Read Also: Goods and Services Tax Applicability on Employees Structure

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.

Important: Kerala HC Permits GST Refund as CBIC Clarified Exemption on Employees’ Notice Pay

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.

Applicant NameM/s. Rites Limited
GSTIN of the applicant06AAACR0830Q1ZA
Date18.04.2022
Advance Ruling NoHR/ARL/19/2022-23
Haryana GST AARRead Order
Arpit Kulshrestha

Arpit Kulshrestha seeks higher interests in financial services, taxation, GST, I-T, etc. Writes articles with depth knowledge and is extensive for the same. The resources provide effective articles for the products of SAG infotech which provides taxation and IT software. Writing from observations and researching makes his articles virtuous.

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