Under GST regime, there have been a lot of issues regarding taxability of transactions between employer and employee and applicability of reverse charge mechanism on such transactions. Now, according to clause 1 of Schedule III of the CGST Act, 2017, any services provided by the employee to the employer in course or in the relation of employment shall not be considered as supply. This means that consideration paid for such services shall not be taxable under GST regime. Further, it has been provided under section 15 of the CGST Act, 2017 that employer and employee are related persons.
Employees are being paid back for the business expenses incurred by them on behalf of the employer in furtherance of business. However, reimbursements shall not be liable to GST if services are provided in course of employment. It can be considered that employee here takes the role of agent who does spending on behalf of the employer and hence such transactions will be considered as done by the employer himself (merely payment made by an employee on behalf of the company would not be considered as supply received by the employee). Therefore, in such cases section 9(3) and 9(4) of CGST Act shall come into the picture. Now, these reimbursements shall fall under two heads which are:
1. Reimbursements to employees for expenses incurred from registered dealer
If expenses incurred by the employee are from registered persons then the employer can claim input tax credit on the same provided tax invoice issued by the supplier of goods or services has mentioned the name and GSTN of the employer instead of the employee. For example, if the employee pays on behalf of the company for business promotion expenses then the company can claim input tax credit on such expense on reimbursement made to the employee as an invoice is in name of company. It is pertinent to mention here that the GSTIN of the company should be mentioned on the invoice raised by such registered person.
Also, there would be cases where the company would be ineligible to claim input tax credit even if the employee incurs expenses from registered parties like food and beverages services i.e. restaurant service, health services, etc as mentioned in section 17(5).
2. Reimbursements to employees for expenses incurred from unregistered dealer
If expenses incurred by employee are from unregistered persons then also it will be deemed that the employer has received the said supply and the employee has merely acted as an agent. Also, the ITC paid tax on such supply under reverse charge mechanism shall be admissible just like it is admissible in case of supply from registered dealer. For example, if employee has paid for food and beverages on behalf of employer to unregistered person; then such employer shall pay GST under reverse charge but the credit shall not be allowed as it is blocked credit under section 17(5) of CGST Act, 2017. It is worthwhile to mention here that a company is availing the ITC on the supplies received from the registered person by the employee on behalf of company. This ITC is being availed on the grounds that expense is booked in the company's accounts and it is the company which has actually received the said supply in course or furtherance of business. However, in case of supply from an unregistered dealer, the same company cannot take altogether different stand that the supply is actually received by the employee. If we take a stand while availing the ITC that supply is being used by the company (in case of the reimbursement to the employee in case of registered supplier); the same stand should have to be taken even if the supplier is unregistered. We cannot change the stand/policy as per our convenience or benefit. This may be objectionable by the departmental officers.
Allowance is a fixed amount given to an employee for a specific purpose. The company does not keep a check on how the said amount is actually used. Allowance itself means no tax invoices or receipts are required to be produced by the employee for the spending to the employer. The employee at his / her discretion uses the money with any vendor of his / her choice. The control on such spending shall not be with the employer. For example, each employee has been provided with the travel allowance of Rs. 4000 per month wherein employee at his discretion uses mode of travel whether self or rented and is also not required to produce any invoices or receipts in that respect.
Thus, in case of allowances provided to the employee by the employer, no GST shall be applicable as it is maybe an organizational obligation of the employer and would be serviced in course of employment. It is worthwhile to mention here that in such case, this amount should form part of the salary and the only salary should be debited in the books of the company. No other expense pertaining to this amount of allowance should be debited in the books of the company. Therefore, the company will not be liable to pay tax under reverse charge only if the said amount is treated as salary on which TDS is deducted under section 192 of Income Tax Act and no expense relating to this amount is debited in the books of the company.