'Your number one customers are your people. Look after employees first and then customers last.' said Ian Hutchinson, author of People Glue. It's the employees who help an employer retain his customers and their welfare should be a priority always. But what happens when he has to pay taxes for making them happy too? GST has brought in this weird situation when employers are thinking twice about the value of gifts they should give to their employees and whether the perquisites should be continued or discontinued.
Before 1st July, all that was required of the management was to book the expense on employee welfare in their financials and then never turn back to the page again. But after 1st July, the management is compelled to think about how is he going to treat the facilities he is providing to his employees. And sometimes, he even thinks to the point if it is at all possible, even a small chance, not to give the employee such facility anymore! Such is the condition of the management personnel all over the country and the credit goes to few such provisions newly brought in GST.
Schedule 3, Clause 1 of the GST Act, 2017 states that services by an employee to the employer in the course of or in relation to his employment is an activity which shall be treated neither as a supply of goods nor a supply of services. This means that the consideration paid by the employer to the employee i.e. the salary, shall not be levied to GST. But the question which arises here is that which activities can be treated as 'in the course of or in relation to his employment'? Is providing a transportation facility can be considered as being in relation to his employment? Is providing him a laptop to work, is in the course of his employment? Is serving tea and coffee during the day, in relation to his employment? And many such questions are buzzing in the minds of the employer all around.
What is more haunting is the provision in Clause 2 of Schedule 1 of the CGST Act, 2017. It states that supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business shall be levied to GST even if made without consideration. And, employer and employee are considered to be related persons in terms of Explanation to Section 15. So, this brings forth the question that all those facilities provided to an employee, although said to be in relation to his employment, but if in the course or furtherance of business, whether they will come out of tax net due to Schedule 3, Clause 1 or get caught in the net due to Schedule 1, Clause 2? For instance, a laptop given to employee is in furtherance of the business and so will the employer be required to pay GST on it? Logically, it shouldn’t because an employee has been provided the laptop so that he can deliver his services. Why levy tax on something like this! But confusion is not resolved.
And the most complicating, rather confusing entry, is the proviso to Clause 1 of Schedule 2 mentioned supra. It states that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. Ah, what the law makers forgot here was to insert the definition of gifts in Section 2 of the Act. What should be included and what should not be included in 'gifts' is the most challenging issue. Can the tea and coffee provided to employees be said to be gifts?
Another major issue is, if the value of gifts exceeds Rs. 50,000 even by a single penny, will the entire value of Rs. 50,001 get levied to GST? For instance, if the sum total of the value of gift vouchers given for being the star performer, gift hampers given on Diwali, tickets for tour given on promotion and the like, equals to Rs. 50,500/- in a year, is the employee required to pay GST on the entire value? I guess the employer would rather cut down the gifts so as to keep it within a value net of Rs. 50,000!
In the midst of so many questions, the tax experts have arrived at an answer to these questions, only to conclude that the components covered as a part of the CTC to the employee will be considered to be in the course of or in relation to the employment and so not leviable to GST. This sounds fair, and easy to work. So it goes like this.. tick the facilities mentioned in the employee agreement as a part of CTC, provide those facilities without levying GST and strike the ones not mentioned in the agreement, as GST will be required to be paid on them (and yeah, may be to decide ultimately whether it would be feasible not to provide them at all!). However, in the absence of any clarification from the government, it remains a much-litigated issue whether this can work or not. I hope some clarification is issued by the government soon, so as to solve the mystery behind all these questions!
P.S. - Whatever may be the tax complications surrounding the management, but one thing the employers should always bear in mind that its only when the employees believe that management is concerned about them as a whole person – not just an employee – are they more productive, more satisfied, more fulfilled, leading to more growth and more profit for the company.
Disclaimer: The views expressed in this article are strictly personal