GST on employee reimbursement

This update intends to bring out clarification with respect to taxability of transaction between employee and employer.

With implication of GST Act, lot of confusion has prevailed regarding the taxability of transaction between employee and employer and applicability of Reverse Charge Mechanism on such transaction.

In this update, we look at the applicability of GST on employee reimbursement in detail.

GST is applicable on 'Supplies' of goods and services. The scope of the term 'supplies' has been elaborately defined in Section 7 of the Central Goods and Services Tax Act, 2017 which primarily includes transactions made for a consideration. However, in cases referred to in Schedule I to the CGST Act, transactions are treated as supplies even if the consideration is absent which includes supplies between related persons when such supplies are made in the course or furtherance of business.

In this context, it would be relevant to note that the explanation to Section 15 of the CGST Act provides that employer and employee will be deemed to be 'related persons'. Accordingly, supplies by employer to employees would be liable to GST even though these supplies are made without consideration since they are considered as related persons (except gifts upto Rs 50,000 which has been detailed at a later point in time in this document).

However, Schedule III to the CGST Act provides that 'services by employee to the employer in the course of or in relation to his employment' will not be considered as supply of goods or services and hence GST is not applicable on services rendered by employee to employer provided they are in the course of or in relation to employment.

Hence, transactions which are excluded from the levy of tax for transactions between employee and employer are

1. Supply of services by employee to employer in the course of employment

2. Gifts by Employer to employee not exceeding Rs 50,000 in a Financial Year. Based on the above stated statutory provisions, in the ensuring paragraphs, we have tried to analyse the tax impact on various transactions between the employer and employee

a) Employee Reimbursement - Purchase from Registered Dealer

- Reimbursement of expenses relating to goods / services procured from registered supplier and the GST Number of the employer is quoted on the invoice - Vendor to charge tax (if taxable supplies) and employer entitled to claim credit subject to input tax credit restrictions.

- Reimbursement of expenses relating to goods / services procured from registered supplier and the GST Number of the employer is not quoted on the invoice - Vendor to charge tax (if taxable supplies). Employer not liable to GST under reverse charge since the procurements have been made from registered dealer except that the GST Number of the employer has not been quoted on the invoice

b) Gift to Employee under GST

As per provisions of Schedule II, read with Section 7 of the CGST Act, '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'.

The definition of gift has not been provided in the GST Acts hence we have to consider the definition as provided under other Acts. As per section 122 of the Transfer of Property Act, 1882 the definition of gift is as under:

'Gift is the transfer of certain existing movable or immovable property made voluntarily and without consideration, by one person to another and accepted by or on behalf of the donee.'

Hence it can be concluded that anything given voluntarily without any consideration can be considered as a gift. Therefore, Diwali gifts given to employee will not be subject to GST if value is less than INR 50,000 in any financial year.

C) Notice Pay Recovery

Employees who resign from their job are expected to serve notice period as mentioned in the employment contract. If the employee does not serve such notice period, the salary of the unserved portion of notice period is retained by the employer.

Notice pay recovery (Savings in expense which can be viewed as income to the employer) This issue was subject matter of litigation in service tax laws also and there were contrary decisions as regards levy of service tax on notice pay. The revenue authorities contend that the consideration to the employer for 'tolerating the act' of the employee to not serve the notice period which was the employee’s contractual obligation and so the transaction is liable to GST. However, recently, the Hon’ble Madras High Court has held in the case of GET & D India Ltd. that service tax is not leviable on notice pay recovery from employees as it cannot be considered to have been covered by declared service of tolerating an act. It can be said that the ratio of this decision can be applied in GST regime as well and GST should not be levied on notice pay recovery.

d) Disposal or Sale at concessional rate

Companies might allow employees to retain asset like laptop, Bike & Car etc. when he quits the organization or allow the employee to use a company asset for personal purposes. In such cases, the employer will have to pay taxes on the value of such assets if credit is availed on such assets since this transaction will get covered under Sl. No 1 of Schedule I to the CGST Act, 2017.

Based on the above, we can observe many transactions occurs between employee and employer and the leviability of GST needs to be examined individually on case to case basis.

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The content of this document is solely for informational purpose.