Employer is liable to pay GST@18% on recovery of Notice Pay from the employees.

Last updated: 20 January 2021

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The Gujarat Authority for Advance Ruling has determined that employers are liable to pay 18% Goods and Services Tax (GST) on any 'notice pay' they recover from employees who fail to serve their full notice period. This recovery is considered a supply of service by the employer to the employee, thus attracting GST.

Court :
Gujrat AAR

Brief :
The applicant submitted that they are a 100% Export Oriented Unit (EOU) engaged in the manufacturing of pharmaceuticals products. They, at the time of appointing any employee at their factory situated at 882/1-871, Ground Floor, Near Hotel Karnavati, Sarkhej-Bavla Highway, Village-Rajoda Bavla, Ahmedabad-382220 (Gujarat), are entering into contract with employees by issuing “Appointment Letter”.

Citation :
ADVANCE RULING NO. GUJ/GAAR/R/51/2020

GUJARAT AUTHORITY FOR ADVANCE RULING,
GOODS AND SERVICES TAX,
A/5, RAJYA KAR BHAVAN, ASHRAM ROAD, AHMEDABAD – 380 009.

ADVANCE RULING NO. GUJ/GAAR/R/51/2020
(IN APPLICATION NO. Advance Ruling/SGST&CGST/2019/AR/18)
Date: 30.07.2020

Name and address of the applicant :M/s Amneal Pharmaceuticals Pvt. Ltd.,
882/1-871, Ground Floor, Near Hotel Karnavati, Sarkhej-Bavla Highway, Village- Rajoda Bavla, Ahmedabad
382220 (Gujarat).

GSTIN of the applicant:24AAGCA0781K1ZP

Date of application:05.03.2019

Clause(s) of Section 97(2) of CGST / GGST Act, 2017, under which the question(s) raised. : (g) Whether any particular thing done by the applicant with respect to any goods and/or services or both amounts to or results in a supply of goods and/or services, within the meaning of that term?

Date of Personal Hearing :09.07.2020

Present for the applicant:Shri Satyajit D Naik

B R I E F FA C T S

The applicant submitted that they are a 100% Export Oriented Unit (EOU) engaged in the manufacturing of pharmaceuticals products. They, at the time of appointing any employee at their factory situated at 882/1-871, Ground Floor, Near Hotel Karnavati, Sarkhej-Bavla Highway, Village-Rajoda Bavla, Ahmedabad-382220 (Gujarat), are entering into contract with employees by issuing “Appointment Letter”. Under appointment letter, it has been clearly mentioned that, either parties shall serve a three months mandatory notice to terminate this contract. Thus, three months’ notice is mandatory for all employees/employer. In case, if any employee doesn’t serve the notice period after tendering the resignation, then as per contract (Appointment Letter) condition, company is entitled to recover the notice pay from the agreed portion of salary to compensate the loss to company. The condition is hereby reproduced below:

“Your services can be terminated by giving three months’ notice or notice pay in lieu of notice period from either side.”.

To know more in details find the attachment file

FAQ :

The applicable GST rate on recovered notice pay is 18%.

The recovery of notice pay is considered a supply of service by the employer to the employee, which is taxable under GST regulations.

The employer is liable to pay the GST on the amount of notice pay recovered from the employee.

The ruling applies when an employee fails to serve the mandatory notice period as per their employment contract, and the employer recovers pay in lieu of that notice.