08/02/2020
Notice Recoveries From an Employee Subjected to GST or Not?
This is the contraversy in GST whether notice recovery would be subjected to GST or not which have been elaborated as follows:
The controversies :
Employer tolerates the act of Employee - Supply of services by way of agreeing to an obligation to refrain from an act or to tolerate an act or a situation, or to do an act is considered as supply of services.2 Any act of tolerating in lieu of consideration qualifies as supply of service under GST. The department argues that employer tolerates the act of employee in lieu of notice pay recovery after the termination of employment agreement. Hence, such recoveries should be subjected to GST.
Supply between Related Persons after termination of Employment Agreement - Schedule I of the CGST Act, 2017 explains activities treated as supplies even when made without consideration. This includes supply made between related parties when made in course or furtherance of business. Another argument put forth by department is that the supply of notice pay recovery is between related persons, i.e., between employer and employee after termination of employment agreement and, hence, should be taxable.
On the basis of above arguments department tends to recover GST on notice pay recoveries.
GST should not be recovered on 'Notice Pay' :
Obligation arising out of Employment Agreement - There is counter-argument being advanced against GST on notice pay recoveries by taxpayers. GST is levied on every supply of goods and services made for a consideration in course or furtherance of business. Schedule III of the CGST Act enlists activities or transactions which shall neither be treated as supply of goods nor supply of services. Clause 1 of Schedule III states that services by an employee to the employer in the course of or in relation to his employment shall not be treated as supply of services. This would mean that services by employee provided in course of employment will not be treated as 'supply' under GST.
We know that obligations of employee flow from contractual relationship established in accordance with the employment agreement which contains clauses like work hours, salary, notice period, notice pay, etc. This essentially means that notice pay is an obligation arising in course of employment. Accordingly, GST should not be levied on notice pay recoveries.
Madras High Court rescues Taxpayers: Notice Pay Recovery not a taxable service - In a very welcome and significant development, Madras High Court in Ge T & D India Limited CaseGe T & D India Limited v. Deputy Commissioner Of Central Excise, Large Tax Payer Unit, Chennai, 2020-VIL-39-MAD-STheld that employer has merely facilitated the exiting of employees and, hence, notice pay recoveries cannot be considered as taxable services.
Our Expert Comments: There was contraversy before the madras high court order that the GST would be applicable on notice recovery from an employee. But now it is crystal clear that considering the schdule III of Section 7 of GST law, notice period recovery shall be considerd under the due course of employment and GST shall not be applicable.
