Goods and Services Tax Applicability on Employees Structure

This Article deals with defining and categorizing the transactions between the employer and employee from GST point of view.

After the inception of GST with effect from 1st July 2017, Taxes are applicable on almost all Goods [moveable property] and services [anything other than goods]. Some goods and services are exempted from taxation as notified in the GST Act.

Latest Update

24th January 2022

• Maharashtra AAR has circulated the judgement for the M/s Syngenta India Limited manufacturers. The judgement said that no GST levy on recoveries from employees for insurance. Read Order

21st December 2021

• Mumbai GST AAR authority has ruled that the partial recovery of transportation costs from its employees by the PVT company is not considered as a supply therefore no GST is levied. Read Order

Pertaining to the Third Schedule in the GST Act, the service provided by employees of a company to their employer in relation to employment, is not liable to GST. This rule has been included in the Third Schedule Entry 1 under the GST law. To get the employment fall under the Third Schedule of the GST regime, the relationship between the employer and employee is the most important and the employee must be imparting service for the employer under the employment.

1) Employer Supplies Goods/Services to An Employee Against Any Recovery

However, the scenario where the employer supplies goods/services to an employee against any recovery being done from him, then in a situation where the employee consumes the goods/service as supplied by the employer, the employee would be considered as a goods/service recipient.

2) Supply of Goods/Services Between Related Persons

The supply of goods/services between related persons is considered as ‘Supply’ and this has been covered in Entry 2 of the First Schedule of GST law. Detailed understanding of the concept is such that when an employee is a related person of the employer and receives a gift worth less than Rs 50,000/- per year by him, such goods are kept out of the GST taxation regime and GST ambit.

The other condition which could be covered under the First Schedule Entry 2 is the situation when any facility (such as a canteen) or goods (like a used car) is supplied to the employee by the employer, even in no consideration situation.

The GST Implications of Recoveries from Employees:

The GST rule implication is restricted and applicable forth 1.7.2017.

• Payments/recoveries from employees by an employer and GST
• Taxable Goods/Services provided for consideration by employer:

The employers perform various activities for their employee’s consideration. In such scenarios, GST would be levied on the gross amount, charged as a consideration against such taxable supply of goods/services.

Situations Not Being Covered Under Any of the Exemption Entries

• The cases where the employees pay for such goods/services which are not covered through an exemption entry, such cases are liable to GST.
• In a case where goods/services are provided at the cost of deduction of a portion from the salary as accepted by the employee. This type of activity would be said to be ‘provided for a consideration’ and is subject to GST.

Examples are as follows:

• Old laptops supplied to the employees for payment from the employee
• Offered car facilities to employees against payment
• Recovery towards canteen/transport facility

Valuation of Goods/Services Supplied to Employees

When the cost of supply of goods or services is recovered by the employee then it should be considered as a service which has been provided by the employer to the employee and GST is hence applicable on such transaction.

Whether there is any margin or not on the recovery made from the employee, there is no change in the tax implications and the employer and the employee are related to each other.

Thus, on such transactions where the supply takes place between related persons, i.e, the employer and the employee, the valuation would be applied based on the valuation rule 28

Now, let’s discuss the value on which GST is payable:

• On the open market value
• On the value of supply of goods or services of like kind and quality, where open market value is not determinable
• 110% of Cost, where both a and b are not determinable

GST and Reimbursed Expenses:

The Company certain times suffers expenditure like the telephone bills etc. and facilitate the employee and later get the same recovered from his salary. Thus, as per Section 15 (2)(c) under GST Act if there exists an incidental expenditure or cost incurred at the time or before the supply of the relevant goods or services, then the same would be included in the value of taxable supply of goods/services while the GST is being computed such that the reimbursements could become a part of the taxable value.

The exception to this provision: The expenditure or cost would be accounted total to the recipient while the exclusion may be hard to avail as per Rule 33 of GST Rules.

Exempted Services:

When the employer supplies goods/services to his employees and no GST is levied on such a supply, then the supplier company is exempted from the GST applicability.

Examples of Such a Case:

An exempted service on which tax is not payable, such as, a guest house accommodation service. A tax would not be charged to the owner of such a unit of accommodation if the value of the supply of such an accommodation is below Rs.1000 per day or equivalent (Vide entry 14 in the notification no.12/2017-CT (rate).

GST and Facility Provided on Free of Cost Basis:

As per the vide Schedule I entry 2, the proviso gifts which have been gifted by the employer to the employee, having value more than Rs 50,000/-. Also, the transaction has been made in the course or furtherance of the business and is without consideration, then such a transaction is subject to GST.

We need to examine and categorize things which could be considered as gifts as ‘Gift’ has not been defined under the GST law. Commonly, Gifts are voluntary in nature and is made occasionally.

Questions as below need to be answered:

1. Whether the facilities like canteen, health club etc, which is being provided to all the employees free of charge is taxable to GST?

If the above-mentioned services are being provided to all the employees by the employer then the same would not be subjected to GST conditioned,  the appropriate GST was paid at the time of procurement by the employer. This has been clarified through a press release.

The above-mentioned facilities when supplied to employees under the terms of employment, and could be used without any deduction from the salary, is not liable to GST.

Notice Pay Recovery

It is the consideration through which the employer agrees to let the employee vacate his office earlier than the notice period.

Notice pay recovery is the consideration received by the employer for letting the employee vacate his office earlier than the notice period requirement. The services provided by an employee to the employer could not be excluded from the tax net and is subject to GST.

The employee leaving office is not an unforeseen circumstance and is in sync with the provision of service being provided by employers. An employer is eligible to claim for a consideration that GST is leviable on any supply of service or activity done.

Consequently, if no service or activity is taking place by employer’s side in exchange for notice pay recovery, in such a scenario the GST levy fails.

The act may be termed as the ‘agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act’ treated as the supply of services under Schedule II Entry-5(e) of GST Law. While the employer may decide to pay the GST on such recoveries.

Relevant Advance Rulings

In a case related to case of M/s Caltech Polymers Pvt. Ltd. – 2018-TIOL-01-AAR-GST, the Kerala Authority for Advance Ruling shared its view and said that the supply of food by an employer to its employees should definitely be kept under the scope of business as it is a transaction incidental or ancillary to the main business.

This proposed rule has been affirmed by Appellate Authority for Advance Ruling under GST, Kerala- 2018 (18) G.S.T.L. 373 (App. A.A.R. – GST).

In Posco India Pune processing centre Pvt Ltd (2019- TOIL-25-AAR-GST), there is provision for recovery of Parents Health Insurance expenses from an employee against the insurance provided by the applicant. But, an applicant is in no way offering any service of health insurance to the employees hence, there is no supply of service as per u/s 7 of the CGST Act, 2017. Thus, the applicant cannot claim ITC of GST charged by the Insurance company in such case.

Comments

The rules being followed in Posco India, does not go with the current GST law as it does not coincide with the Schedule I entry 2, according to which taxes are applied on the supply of goods/services by employer to employee, being related persons, even without consideration, which is accepted as supply under and taxable to GST.

Conclusion

The facilities which are given to the employees by their employers in the employment based on the terms and conditions of the employment, GST would not be applicable on any such facilities and relaxations.

However, such facilities are treated as perks in the hands of an employee. The same is required to be looked upon for income tax purposes.

The article has been written in order to examine the implications of employee recoveries under GST.