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Clarification on GST on salaries paid to CEOs or Employees

CA Shubham Kumar 
on 19 November 2019


Recently Central Board of Indirect Taxes & Customs (CBIC) issued a clarification on GST implication on Salaries paid to key management personnel and employees. In this clarification, CBIC clarifies that GST is not applicable to the salary paid to the employees because it is under schedule III of the CGST Act, 2017. As per this entry, GST is not applicable to any service provided to the employee to the employer. Before this clarification, many confusions had been arisen on the applicability of GST because of news published in Media on 14.11.2019 under the head "Tax department wants to impose 18% GST on CXO salaries."

 

As per the news published in Media, The Department wants companies to proportionately distribute common costs (including salaries of employees and KMPs) from head office to branch offices and treat this as a supply. Once this is treated as supply, 10% of it has to be added to the cost, and 18% Goods and Services Tax (GST) could be levied on the total amount.

As per entry 1 of schedule III of the CGST Act, 2017, "Services by an employee to the employer in the course or in relation to his employment" shall be treated neither a supply of goods nor supply of services. So as per this entry any salary paid to CEOs or employees not liable to GST and not required to be cross charged between inter branch.

 

Previously, Advance ruling issued by the AAR, Karnataka in the, issued for Columbia Asia Hospitals private limited & observed that: -

  • Employees working at corporate office providing services to corporate office have employer-employee relationship only at such corporate offices.
  • Offices other than corporate offices are distinct offices employer-employee and employees working in corporate offices have no employer-employee relationship with other offices.
  • Such services shall be treated as taxable supplies as per section 7 read with Entry 2 of Schedule-I of CGST Act, 2017.
  • Valuation of such employee's services to other distinct offices shall be done as per section 15(4) of CGST Act, 2017 and Rule 28 of CGST Rules, 2017 applicable to supplies between distinct persons.
  • In cross charge, there is an element of service rendered by a person who cross charges his other units even though they belong to the same legal entity.

As per the above ruling, GST is applicable inter-branch salaries paid to CEOs or employees when the company cross charged this amount to another branch (distinct person).

 

On the above issues, CBIC clarifies that GST charged on the prices/charges by any supplier of goods or services from his consumers does comprise all costs including cost of raw material, capital goods, input services and employee costs, etc. But this does not mean that salaries paid to the employees by the employer are being taxed under GST.

Conclusion: As per the press release issued by the CBIC, GST is not applicable employer-employee salaries paid to CXOs and employees and not required to be cross charged between distinct persons.

The author can also be reached at cashubham2014@gmail.com


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