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Arjuna (Fictional Character): Krishna, what havoc going on in IT Companies' employees leaving organization?

Krishna (Fictional Character): Arjuna, in IT sector, in these days a huge turnover of workforce has been seen. Some IT companies are removing employees or some employees are leaving the organization. IT Companies for example Twitter, facebook has fired its workforce. Also, many of its remaining employees have resigned the organization.

What happens when employee leaves the organization

Arjuna (Fictional Character): Krishna, what is meant by notice period and notice pay?

Krishna (Fictional Character): Arjuna, whenever the employer hires an employee in the organization, it enters into an employment contract with such employee. The employment agreement states that if the employee of the company resigns from the organization, then such employee has to mandatorily serve the minimum notice period as mentioned in the said agreement. However, in case if the employee is unable to serve the stipulated notice period, then in such cases, the employer recovers an amount as Notice pay or deducts the said amount from the salary of the employee in lieu of the notice period which has remained un-served by the said outgoing employee.

Arjuna (Fictional Character): Krishna, what are the implications of GST on Notice pay recovery if employees resign voluntarily before the end of contract?

Krishna (Fictional Character): As per the recent Advance Ruling by Haryana Authority, the amount received as Notice pay recovery is not a consideration for any supply of services. These amounts are covered under Schedule III and not clause 5(e) of schedule II appended with the CGST Act, 2017. So, it is outside the scope of supply because the said amount recovered by the applicant is in lieu of un-served notice period/non serving the contract period by the employees. It cannot be regarded as a consideration which has been defined in the section 2(31) of the Act. Further, the transaction with reference to the Notice pay recovered are also not covered under the definition of business 2(17) under the CGST Act, 2017. Notice pay does not result into the provision of service by either party, it is sort of compensation either to employee or employer and not a consideration. It is a safety valve sort of option to both the parties i.e. if one of the party frustrate the employment contract either by reneging or by failing to perform. It is the employee who is the service provider and service supplied by him in the course of its employment is excluded from the definition of Supply under the GST Act. The amount collected as Notice Pay Recovery from the outgoing Employee will not be taxable under GST law.


Arjuna (Fictional Character): Krishna, what are the implications of Income Tax on Notice pay recovery if employees resign voluntarily before the end of contract?

Krishna (Fictional Character): Arjuna, From Employers perspective notice pay charges recovered from the employee will be treated as income of the organization. From Employees perspective Salary paid by the employer will be taxable in the hands of employee not the salary due during the notice period.

Arjuna (Fictional Character): Krishna, what should one learn from this?


Krishna (Fictional Character): Arjuna, Employer as well as employee should carefully go through employment contract before providing and accepting various services under the contract to avoid any further legal repercussion.


Published by

CA Umesh Sharma
Category GST   Report

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