GST liability on employee recovery: Is it the beginning of the end?
The author is a member of the Institute of Chartered Accountants of India (ICAI). He can be reached at karanrajvir18@gmail.com and eboard@icai.in.
1. Introduction: Commercial Dynamics of Perquisite Recoveries
Employers often arrange for various facilities such as transportation, canteen, healthcare, insurance etc. for their employees. Such facilities are usually procured by the employer from third party vendors on payment of tax and made available for use by the employees. These facilities which are supposed to be utilised by the employee during the course or furtherance of employment are provided either free of charge, or employer recovers a very nominal amount from his employees towards the said facility.
“Employers often arrange for various facilities such as transportation, canteen, healthcare, insurance etc. for their employees. Such facilities are usually procured by the employer from third party vendors on payment of tax and made available for use by the employees.”
The cases in which employer recovers nominal amount (or for that matter even full amount), department has often raised issues on taxability of cost recoveries made by the employer from the employees for providing the said facilities. While the matter is yet to have any official conclusion from GST council, Hon’ble High Courts and advance ruling authorities have provided their views which are discussed in this article.
2. Notice Pay Recovery under Service Tax Regime: High Court & Appeal Rulings
While there have been many orders for and against the levy of service tax on notice pay recovery, there have been recent decisions post July 2017 where order against levy of service tax on notice recovery has been pronounced:
Commissioner (Appeals) Ahmedabad – M/s QX KPO Services Private Limited (29 September 2017)
Referred to “education guide” issued by CBEC in June 2012. Para 2.9.3 of the said guide states that “such amounts paid by employer to employee for premature termination of a contract of employment are treatable as amount paid in relation to services provided by the employee to the employer in the course of employment. Hence, amounts so paid would not be chargeable to service tax”. The learned Commissioner was of the view that any payment made by either of the party to the other would not be chargeable to service tax and hence service tax may not be levied on notice pay recovery.
Hon’ble Madras High Court – GE T&D India Limited v. Deputy Commissioner of Central Excise, Chennai (7 November 2019)
Also referred to above mentioned guide notes. Hon’ble Madras High Court has laid down that the employer cannot be said to have rendered any service per se much less a taxable service and has merely facilitated the exit of the employee upon imposition of a cost upon him for the sudden exit and therefore will not attract levy of service tax.
CESTAT Allahabad – HCL Learning Limited v. CCE, Noida (25 November 2019)
CESTAT Allahabad has passed an order against the levy of service tax on notice pay recovery, aligning with the principle that employer-employee contractual exits do not constitute a taxable service.
3. GST Statutory Framework: Schedule III & CBIC Press Release
Taxpayers have often taken recourse of press release dated 10 July 2017 issued by CBIC while arguing against taxability of employee recoveries. The press release clarified that:
“It is pertinent to point out here that the services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods or supply of services). It follows therefrom that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST.”
Schedule III to CGST Act, 2017 provides for activities or transactions which shall be treated neither as a supply of goods nor supply of services. Entry 1 of Schedule III covers services by an employee to the employer in the course of or in relation to his employment.
4. Initial Advance Rulings in Favour of Levying GST on Employee Recoveries
In light of queries raised by department and lack of complete clarity in the above stated press release, various applicants in different states have sought rulings from Authority of Advance Ruling to get an authoritative ruling. Notable among them are discussed as under:
Caltech Polymers Pvt. Ltd., Kerala (AAR Order: 26 March 2018; AAAR Order: 25 September 2018)
Engaged in the business of footwear, provides canteen facility to its employees as the same was mandatory under provisions of Factory Act, 1948. Canteen facility is entirely managed by the company. Company recovers cost of the food items from its employees without making any profit. Authority of Advance Ruling (“AAR”) Kerala laid down that the said activity falls within definition of supply provided in section 7 of the CGST Act, 2017 (“the act”) and hence company may be liable to GST on recovery of food expenses from employees. The view was upheld by Appellate Authority of Advance Ruling (“AAAR”), Kerala.
Musashi Auto Parts Private Limited (Haryana AAR Order: 4 February 2020)
Engaged in the business of manufacturing auto parts. Company under provisions of Factory Act, 1948 provides canteen facility to employees at their factory premises. Company recovers nominal amount from employees as reimbursement of canteen expenses without any commercial objective but to maintain discipline and avoid food wastage. AAR Haryana has laid down that the transaction will be covered under definition of supply provided in section 7 of the Act and will not fall under entry 1 of Schedule III of the act. Hence, Company may be liable to GST on canteen recovery made from employees.
M/s Beumer India Private Ltd (Haryana AAR Order: 29 October 2020)
Similarly, AAR Haryana in case of M/s Beumer India Private Ltd has laid down that the transport facilities provided by employer to employee either free of cost or upon collection of a nominal amount, would be a taxable service under GST and for valuation of such services, provision under Section 15 shall be applicable.
5. Recent Advance Rulings Against Levy of GST on Employee Recoveries
While the above advance rulings favoured levy of GST on employee recoveries, recently there have been quite a few rulings in favour of taxpayers i.e., GST liability is not required to be discharged on various employee recoveries:
Tata Motors Limited (Maharashtra AAR Order: 25 August 2020)
One of the early rulings against payment of GST on transport recovery from employees. AAR Maharashtra laid down that GST is not applicable on nominal amount recovered by applicant from employees for usage of employee bus transportation facility in non air-conditioned bus. The authority is of the view that transport services provided by employee will be covered under entry 1 of Schedule III of the act and accordingly GST is not applicable on nominal amount recovered from employees.
Amneal Pharmaceuticals (Gujarat AAAR Order: 8 March 2021)
Pronounced order against levy of GST on canteen recovery. The Company has appointed a caterer who provides food to the employees of the company. Partial cost of caterer was borne by the company and partial amount was borne by employees. However, the partial amount borne by employees was paid to the Company who in-turn paid the same to caterer without any profit. The Company had argued that it is collecting the portion of employee cost from salary and paying to third party i.e., canteen service provider. In the view of AAAR and Company, this is nothing but a facility provided to employees without making any profit. Company is working as mediator between employees and contractor / canteen service provider, therefore no Goods and Services Tax would be payable by employees to company on the subsidised value of food.
Multi-Perquisite Non-Levy Decisions: Bharat Oman & Emcure Pharmaceuticals
In the above two rulings, only one type of employee recovery has been discussed. However, in the case of M/s Bharat Oman Refineries Limited and M/s Emcure Pharmaceuticals Limited, multiple type of employee recoveries were discussed and ruling against levy of GST has been passed. Order for non-levy of GST against below mentioned recoveries has been passed:
| M/s Bharat Oman Refineries Limited (Madhya Pradesh AAAR order dated 8-Nov-2021) |
M/s Emcure Pharmaceuticals Limited (Maharashtra AAR order dated 4-Jan-2022) |
|---|---|
|
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In both the orders, reliance has been placed on order of Hon’ble Madras High Court in case of GE T&D India Limited v. Deputy Commissioner of Central Excise, Chennai while allowing non-levy of GST on notice pay recovery.
6. Chronological Ruling Timeline & Questions of Fact and Law
The above advance rulings can be plotted on the chronological timeline illustrating the decisive jurisprudential transition:
Chronological Trajectory of Advance Rulings (2018–2022)
“GST law is comparatively new and is continuously evolving. There have been number of decisions in favour and against payment of GST liability and hence, it may be too early to arrive at any definitive conclusion.”
GST law is comparatively new and is continuously evolving. From the above pattern, it can be observed that recently AARs and AAARs are passing order in favour of taxpayers. However, we understand that there have been number of decisions in favour and against payment of GST liability and hence, it may be too early to arrive at any definitive conclusion. While passing the orders, the authorities have analysed various question of facts and laws which are summarised as under:
Question of Facts Analysed by Authorities
- Whether taxpayer is earning any profit while making recovery from employee?
- What are the conditions stipulated in contract between taxpayer and third-party service provider?
- Whether taxpayer has documented employee recoveries in employment letter issued to its employees?
- Whether taxpayer is merely acting as agent while collecting amount on behalf of third-party service provider from employees.
Question of Law Analysed by Authorities
- Whether amount collected from employees fall within definition of “Consideration” as defined in section 2(31) of CGST Act, 2017?
- Whether transaction between employer and employee falls within scope of “Supply” defined in section 7 of CGST Act, 2017?
- Whether transaction can fall under entry 1 of Schedule III to CGST Act, 2017 and thereby consider the activity neither as supply of goods neither as supply of services.
While passing orders in favour of taxpayers, Hon’ble AAR and AAAR have either considered that employee recoveries do not fall within the scope of “Supply” or fall within ambit of entry 1 of Schedule III to CGST Act, 2017, depending upon facts of the case.
7. Conclusion & Key Industry Takeaways
• Apex Court Adjudication Pending: While recent advance rulings have been good news for the taxpayers, the matter is yet to be confirmed by the Apex court.
• Third-Party vs Self-Managed Canteen Distinction: In case of canteen recovery, all the above-mentioned favourable rulings have been passed in case where appellant has appointed a third-party service. In cases where appellant themselves maintain and provide canteen facility (as in case of Caltech Polymers Pvt. Ltd.), author is yet to come across order in favour of taxpayer.
• Notice Pay Precedent: In case of notice pay recovery, order passed by Hon’ble Madras High Court in case of GE T&D India Limited v. Deputy Commissioner of Central Excise, Chennai under service tax regime may be considered crucial for the taxpayers.
• Urgent Need for CBIC / GST Council Clarification: Since it may not be possible for all the taxpayers to file advance rulings, CBIC or GST council may provide much needed clarity on the matter to avoid unnecessary litigations on the issue that concerns taxpayers across various industries.