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India: Applicability of GST to Employee Payments

In a recent case, the Authority for Advance Ruling held that payments made by employees to employers towards an early exit and in lieu of serving the full notice period specified under contract, will be subject to the Goods and Services Tax (“GST”).

The Authority for Advance Ruling (“AAR”) in the case of Bharat Oman Refineries Limited (“AAR Ruling”) has held that the following payments / benefits will be subject to Goods and Services Tax (“GST”):

  • payments made by employees to employers in lieu of serving the entire notice period;
  • insurance premiums recovered at actuals from existing employees for covering non-dependent parents, and from retired employees for continuing to avail benefits under group insurance policies; and
  • value of canteen facility provided to employees and telephone charges recovered from them.

The AAR Ruling follows on the heels of a similar one in the case of Amneal Pharmaceuticals, wherein payments made by employees in lieu of serving the entire notice period was held to attract GST.

Interestingly, two important issues emerge from this AAR Ruling. Firstly, the AAR Ruling ignores the aspect that the applicable entries under the Service Tax law (tolerating an act) and under the GST are pari materia. Therefore, the earlier judgments including that of the Madras High Court and that of the Tribunal will continue to hold fort. Secondly, the Tax Department’s view which was put forth by the Jurisdictional Officer was that GST is not payable on these activities. The AAR Ruling also does not comment on this aspect. Therefore, the fact that the Tax Department itself holds a view that such recoveries are not chargeable to GST, would be helpful for other assets, especially in the State of Madhya Pradesh.

Key Action Points for Human Resources and In-house Counsel

While AAR rulings are typically binding only on the applicant and the jurisdictional officer concerned, they do provide valuable insight on the authority’s interpretation of the provisions of the CGST Act. Given that a fair number of employers do permit employees to leave early, this ruling will definitely be useful to examine the GST impact (if any) of such notice period payments made by employees. Also, employers could, while structuring various employee benefits and reimbursements, not only examine their impact from a Wage Code and income tax perspective but also understand in detail, whether any recoveries made from employees would result in liability under the GST regime.

The AAR also answered specific questions on Input Tax Credit (“ITC”) with respect to the above. Read more.