Reimbursement of Retrenchment compensation

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Sahil Sharma (Querist)
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29 June 2020 Hello all,

I am working as a contractor in a factory from last 10 years and now the factory is sold to another company due to no work and our services has been terminated from immediate effect. So we plead to the old management about the problems we will face & hence the management decided to reimburse the retrenchment compensation payable for the employees employed by us for execution of contract service. The management is asking us to give a bill of supply or anything but not a tax invoice under GST, as according to them GST is not chargeable on the reimbursement of retrenchment compensation on closure of work. (reimbursement will be as per actuals). However the company has deducted TDS u/s. 194C on such reimbursements.

My query is: -
1) Whether the management is correct and should i raise a voucher or any other document in lieu of payment receiveable?
2) Whether this amount will form part of my GSTR3B & GSTR1?
a) if yes then where to show it? or
b) If no then there will be mismatch between my GSTR & Form 26AS & ITR?

Please reply at an earliest.

Thanks & Regards.

Lekhraj sood

Lekhraj sood (Expert)
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30 June 2020 You have to look at the agreement between you and company and ascertain as to who is liable under the contract to bear cost of retrenchment compensation.Your contract will be mostly for providing certain services to the company. If it is your responsibility as an employer then you will raise invoice for reimbursement of retrenchment compensation and in my view GST will be chargeable.

Sahil Sharma

Sahil Sharma (Querist)
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06 July 2020 Thanks for the reply sir.
As per agreement under normal situations we are liable to pay the retrenchment compensation to our employees but since it is owing to a situation though peculiar in nature has been originated from the principal employer side & only because of that reason only that they are providing this reimbursement for the first time to all the contractors working in the factory, they are of the view that no GST will be chargeable as it is neither a supply of goods or service and it is out of GST.
So, even if we charge GST and raise invoice they are not going to pay for the same. In that case should i raise invoice on my own and deposit GST on my own accord?

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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20 July 2025 This is a very relevant and complex situation, especially under GST, where reimbursement of retrenchment compensation intersects with contractual obligations, taxability, and return compliance.

Let’s analyze your case step by step, and provide clear, actionable advice.

✅ Background Summary:

You are a contractor who had engaged workers to provide services to a factory (principal employer).
The factory has now been sold, and your contract has ended.
As a goodwill gesture (not contractual obligation), the principal employer is reimbursing you for retrenchment compensation paid to your workers.
They are asking for a Bill of Supply, not a Tax Invoice, claiming this is not subject to GST.
However, they are deducting TDS under Section 194C (treating it as payment for work/services).
⚖️ Legal & Tax Analysis

🔹 1. Is reimbursement of retrenchment compensation a 'supply' under GST?
The answer depends on who is actually liable to pay this compensation:

✅ If YOU (contractor) are liable to pay retrenchment under the contract:

Then the amount paid by the principal to you is a reimbursement of your business cost.
In this case, it forms part of your outward supply, and GST is applicable, even if reimbursed at actuals.
You must issue a Tax Invoice, and include it in GSTR-1 and 3B.
❌ If the principal employer is voluntarily paying retrenchment compensation (not contractually required of you):

Then you are just acting as a pass-through, and it's a pure reimbursement.
In this case:
GST is not applicable
You may issue a Reimbursement Voucher or Bill of Supply without GST, clearly noting:
“No GST applicable – reimbursement of retrenchment compensation on behalf of principal.”
🔹 However, since Section 194C TDS is being deducted, this weakens their "non-taxable" position, because TDS under 194C applies to contractual service payments, not reimbursements.
📌 Your Questions Answered

Q1. Should I raise a tax invoice or a voucher/Bill of Supply?
Answer:

If contractually it’s your liability, raise a Tax Invoice with GST.
If it’s voluntary reimbursement by principal, and you’re just a channel, raise a Bill of Supply or reimbursement voucher without GST, with clear narration.
Q2. Should this be shown in GSTR-1 and 3B?
Answer:

If Tax Invoice is raised with GST: Yes, include in B2B outward supply in GSTR-1 and 3B in taxable outward supplies.
If No GST charged: Then do not include in GSTR-1 or 3B.
Q3. Won’t there be mismatch with Form 26AS & ITR if not shown in GSTR?
Answer:

Yes, mismatch may arise between Form 26AS (due to TDS) and your GST returns.
But mismatch between Form 26AS and GSTR is not fatal unless queried by GST or Income Tax authorities.
🔹 You must reflect the amount in your Income Tax Return, even if not in GST returns.
✅ Practical Recommendations:

Step Action
1 Check your original agreement – were you liable to pay retrenchment compensation?
2 If yes → Raise Tax Invoice with GST and declare in GSTR-1/3B
3 If no → Raise Bill of Supply or Reimbursement Voucher without GST, with note explaining the situation
4 Keep all correspondence (emails, minutes, letters) proving it is a voluntary reimbursement
5 Reflect total receipt in Income Tax Return, even if not shown under GST
6 Consider filing Form 26Q clarification with payer if mismatch arises
✉️ Sample Narration for Bill of Supply:
"Reimbursement of retrenchment compensation paid to contract workers, being actual cost incurred due to termination of contract caused by closure of factory operations. Not being a supply under Section 7 of CGST Act. GST not applicable."

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