Applicability of s. tax on notice pd. salary recovered

Dear Sir,

The query is as regards, Company’s liability to pay service tax on recoveries made from the employees, who fail to serve the notice period as per terms of appointment:

1. As per section 66E(e), “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” constitute declared service. When any amount is recovered by the Company from an outgoing employee in lieu of notice period, it constitutes tolerance of the act of separation of the employee without serving the notice period as mentioned in appointment letter. Further, by virtue of the payment made / consideration received from the employee, the Company refrains from acting against the interests of the employee and allows the separation in breach of the condition mentioned in the appointment letter.

1. Section 65B(44)(b) excludes from the definition of service “a provision of service by an employee to the employer in the course of or in relation to his employment”.

1. In this particular instance, it is the Company who is providing a “service” to the employee as envisioned in section 66(E)(e) and therefore, prima facie, service tax is payable by the Company on all such recoveries made from the employee at the time of full and final settlement.

In view of the above, kindly review and advice whether service tax is to be recovered from employees at the time of full and final settlement in case deduction is made on account of notice period.

CA. K.K. Srivastava