GST Payable on Notice Pay Recovery ?

 

Legal provision involved :

As per Section 7 of CGST Act, 2017 all supplies of goods or services or both made by a registered taxable person for consideration in course of furtherance of business attracts GST. However, Schedule I to CGST Act, 2017 provides that transactions between related parties in the course of furtherance of business are treated as supplies even if it is made without consideration. Explanation to Section 15 of CGST Act, 2017 provides that employer and employee are deemed to be related persons.

Combined reading of afore-mentioned provisions suggests that the supply made by an employer to an employee is liable to GST even if it is made without consideration (except gifts up to INR 50,000).

However, Schedule III of the CGST Act states that ‘services by an employee to the employer in the course of or concerning his employment’ are not considered as supply of goods or services. Therefore, employee remuneration is outside the purview of GST.

 

Analysis & Conclusion

 

As discussed above, services rendered by employees in course of employment are exempted from levy of GST. However, following distinct views emerge while analyzing the issue of levy of GST on notice pay recovery:

Notice pay recovery should be subjected to GST as the act of ‘non-compliance’ of employment contract by employee leads to notice pay recovery. Such ‘non-compliance’ and consequent recovery of amount by employer leads to a situation wherein employer is receiving consideration from employee for toleration of an act. Such toleration of act is defined as ‘supply of service’ in schedule II to CGST Act, 2017

 

 

 

Few judicial decisions on the issue of notice pay recovery in GST regime

 

The AAR, Madhya Pradesh in the matter of M/S. Bharat Oman Refineries Limited [Advance Ruling Order No. 02/2021 dated June 7, 2021] held that, GST is applicable on payment of notice pay as employer is receiving consideration from employee for toleration of an act. Such toleration of act is defined as supply of service in schedule 11 of CGST Act -2017

However same AAR has been reversed by the Appellate Authority of Advance Ruling and held that GST is not applicable on notice pay recovery as Schedule III of the CGST Act states that  services by an employee to the employer in the course of or concerning his employment’ are not considered as supply of goods or services. Therefore, employee remuneration is outside the purview of GST

 

Judiciary decision supporting above view from service tax regime

 

Order of Commissioner (Appeals) in case of M/s. Gujarat State Fertilizers & Chemical Ltd – It held that cessation of employment is treated as employment service not liable for the GST.

 

Allahabad CESTAT in case of M/s. HCL Learning Systems Vs CCE, Noida – It held that the amount recovered out of salary already paid is not subject to GST.

 

 

 

 

 

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