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Under GST regime wef 1.7.2017, tax is applicable on supply of goods/services done for a consideration. GST is applicable on goods [moveable property] as well as on the services[anything other than goods] subject to exemptions as notified.

It is to be noted that the service provided by employees of the company (who are under employment with the Company) are covered in the Third Schedule Entry 1 to GST law. Third Schedule covers activities which are neither supply of goods nor supply of services. The said clause contained in the Third Schedule sets out that service provided by employees to their employers in the course of or in relation to employment and are not liable for GST.

It is necessary that the services should be provided by an employee to an employer. The relation of employer and employee is a prerequisite for coverage under the Third Schedule entry.

However when the employer supplies any goods/services to employee against recovery done from employee, then the status of the employee could be as a goods/service recipient rather than as a mere employee when consuming such goods/service.

In the First Schedule to GST law, Entry 2 has an entry for supply of goods/services between related persons, is treated as supply, even when there is no consideration. Employee is related person of employer company. However gifts a value of not more than Rs 50,000/- per year by an employer to his employee are outside the ambit of GST.

Whether the facilities such as canteen or goods such as used car supplied to employee by employer could be considered as covered in First Schedule Entry 2, even when there is no consideration. This as well as other aspects are covered in this article.

The paper writer has restricted examination to the GST implications of recoveries  from employees and facilities given to employees post 1.7.2017.

Payments/recoveries from employees by employer and GST

Taxable Goods/Services provided for consideration by employer:

A number of activities are carried out by the employers for the employees for a consideration. GST is leviable on gross amount charged as consideration for such taxable supply of goods/service.

Where the employees pay for such goods/services [which are not covered in any of the exemption entries], it is liable to GST. Further goods/services may be provided against a portion of the salary foregone by the employee. Even then such activities could be said to be provided for a consideration and thus liable to tax.

Examples are as follows:

  1. Supply of old laptops to employees for payment from employee.
  2. Supply of cars to employees against payment
  3. Recovery towards canteen/transport facility.

Valuation of goods/services supplied to employees

When the cost of supply of goods/services is recovered from the employee, it is a service provided by the employer to the employee and GST is payable on the transaction. There is no change in tax implications whether there is margin or not on recovery made. The employer and employee are related persons. Consequently the valuation is arrived by applying the valuation rule 28 which is applicable on supply between related persons[employer and employee].

The value on which GST is payable would be

  1. Be the open market value
  2. Be the value of supply of goods or services of like kind and quality, where open market value is not determinable
  3. Be 110% of Cost, where both a and b are not determinable

GST and reimbursed expenses:

The Company could incur certain expenditure such as telephone on behalf of the employees and later recover the same at actuals by way of recovery from salary. Section 15(2)(c) of GST Act provides that any incidental expenditure or cost incurred at time of or before supply of goods/services, shall be included in the value of taxable supply of goods/services for the purpose of computing GST.  Thereby the reimbursements could also become part of taxable value.

The exception to this provision would be to incur the expenditure or cost as a pure agent of recipient and it maybe difficult to claim such exclusion by satisfying the elaborate conditions as mentioned in the said Rule 33 of GST Rules.

Exempted services:

When supply of goods/services is done by employer to employees are exempted / excluded from GST levy, then there is no GST applicability on the supplier company.

Examples of same could be exempted services on which tax is not payable such as guest house accommodation services would not be liable to tax if the value of supply of such unit of accommodation is below Rs.1000 per day or equivalent (Vide entry 14 in the notification no.12/2017-CT (rate).

GST and facility provided on free of cost basis:

It maybe noted that vide Schedule I entry 2- proviso gifts of value more than Rs 50,000/- made by employer to employee, without consideration are subject to GST, when made in the course or furtherance of business. We examine what constitutes a gift. Gift has not been defined in the GST law. In common parlance, gift is made without consideration, is voluntary in nature and is made occasionally.

When facilities such as canteen, health club are provided to all the employees free of charge, whether it is taxable to GST? If such services are provided free of charge to all the employees by the employer then the same will not be subjected to GST, provided appropriate GST was paid when procured by the employer. Similarly clarified in press release in this regard.

When the above facilities are supplied to employees under terms of employment, and which may used without any deduction from the salary could not be liable to GST.

Notice Pay Recovery

Notice pay recovery is the consideration received by the employer for letting the employee to vacate his office earlier than the notice period requirement. The services provided by employer to employee, is not excluded from tax net and could be subject to GST.

Employee leaving the office is not an unforeseen circumstances and it is related to provision of service being provided by employees.  Employer could contend GST is leviable on any supply of service done/activity done for a consideration. Consequently as there is no service/activity being done by employer in exchange for notice pay recovery, GST levy fails.

The revenue could object this act could be termed as 'agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act” which is treated as supply of service under Schedule II Entry-5(e) of GST Law. Erring on caution employer may decide to pay GST on such recoveries made.

Relevant advance rulings

The Kerala Authority for Advance Ruling in the case of M/s Caltech Polymers Pvt. Ltd.- 2018-TIOL-01-AAR-GST held that the supply of food by the employer to its employees would definitely come under the scope of business as a transaction incidental or ancillary to the main business. The above ruling has been affirmed by Appellate Authority for Advance Ruling under GST, Kerala- 2018 (18) G.S.T.L. 373 (App. A.A.R. - GST).

In Posco India Pune Processing Center Pvt Ltd (2019-TIOL-25-AAR-GST) where there was recovery of Parents Health Insurance expenses from employee in respect of the insurance provided by the applicant. Since applicant is not rendering any service of health insurance to their employees, there is no supply of service u/s 7 of the CGST Act, 2017. Applicant cannot claim ITC of GST charged by the Insurance company to this extent: AAR


The Posco decision may not be valid in the context of present GST law as it has not examined the Schedule I entry 2  which taxes the supply of goods/services by employer to employee, being related persons, even without consideration which is deemed as supply under and taxable to GST.


It is suggested that the facilities be given to employees as part of terms of employment whereby there could be no GST applicable either. However treatment as perquisite in hands of employee, for income tax purposes may have to be looked into.

In this article the paperwriter has sought to examine the implications of employee recoveries under GST.

The author can also be reached at roopa@hiregange.com

In next article we would examine input tax credit implications of employees related expenses


Published by

CA Roopa Nayak
(Specialized in Indirect Taxes)
Category GST   Report

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