The Authority for Advance Ruling, Maharashtra recently in a case held that GST shall not be levied on recoveries made at concessional rate from the employees namely, canteen recoveries, bus transportation recoveries. The authority also held that GST is not applicable on notice pay recoveries.
Rightly, recovery of notice pay cannot be considered as a consideration. However, the employee recoveries at concessional rates has always been a matter of discussion among the taxpayers. It has a direct relation with the employment contract as well as law related to rate of tax, conditions for the said notified rate of tax. Though the Advance Ruling authorities have given the favorable rulings, but in our opinion, taxpayers need to plan this transaction based on well versed opinions.
Read about the case [M/s Emcure Pharmaceuticals Ltd., GST-ARA-119/2019/B-03, dated 04.01.2022] below:
Facts of Case:
M/s Emcure Pharmaceuticals Limited, the Applicant is a pharmaceutical company engaged in developing, manufacturing, and marketing of pharmaceutical products.
The Applicant provides canteen and bus transportation facility to its employees as a part of employment agreement as per their HR Policy.
The canteen is mandatorily required to be maintained by the Applicant as per the provisions of Section 46 of the Factories Act, 1948. The Applicant is not availing any ITC on the input services of canteen.
The Applicant makes recoveries at subsidized rates for providing canteen and bus transportation facility to its employees by engaging the third-party service providers to provide the said facilities.
When the employees of the company resign and leave the employment without serving the mandated notice period, in part or in full, the Applicant is entitled to receive the monetary compensation by deducting the salary for the tenure of notice period not served, as a compensation for breach of the terms of the Employment Agreement by the employees.
The Applicant had filed an application under Section 97 of CGST Act, 2017 and MGST Act, 2017 seeking an advance ruling in respect of the following questions.
Whether the GST would be payable on recoveries made from the employees towards providing canteen facility at subsidized rates in the factory and office?
Whether the GST would be payable on the recoveries made from the employees towards providing bus transportation facility? If yes, whether the Applicant is exempted under Notification No. 12/2017 Central Tax (Rate)?
Whether the GST would be payable on the notice pay recoveries made from the employees on account of not serving the full notice period?
Advance Ruling:
Question -1: Whether the GST would be payable on recoveries made from the employees towards providing canteen facility at subsidized rates in the factory and office?
Canteen facility services are not output service of the applicant as it is not at all connected to the functioning of their business of developing, manufacturing and marketing of pharmaceutical products.
The provision of canteen facility by the applicant to its employees is a welfare measure, also it is mandatory to maintain canteen as per the Factories Act, 1948.
The applicant is a receiver of such service as the canteen services are provided by the third party vendor to the employees of the company. The partial amount is recovered by the applicant from its employees in respect of use of such canteen facility are a part of the amount paid to the third-party vendors which has already suffered GST.
For a transaction to qualify as supply as per Section 7 of CGST Act, 2017, it should be made in the course or furtherance of business. The provision of canteen facility by the Applicant to its employees is not a transaction made in course or furtherance of business. Therefore, the Applicant is not liable to pay GST on the recoveries made from employees towards providing canteen facility at subsidized rates.
Question No. 2: Whether the GST would be payable on the recoveries made from the employees towards providing bus transportation facility? If yes, whether the Applicant is exempted under Notification No. 12/2017 Central Tax (Rate)?
The applicant is not liable to pay GST on recoveries made from the employees towards providing bus transportation services keeping in view the same facts and base as laid down in Question-1.
Further reliance was also placed on the recent passed advance ruling in the case of M/s Integrated Decisions and Systems India Pvt. Ltd. [GST-ARA-116/2019-20 dated 16.12.2021] wherein the authority held that part recovery of amounts from employees in respect of transport facility provided to them would not treated as ‘supply’ as per the provisions of GST laws and therefore GST would not be leviable on the same.
Question No. 3: Whether the GST would be payable on the notice pay recoveries made from the employees on account of not serving the full notice period?
Service provided by an employee to the employer in the course of or in relation to his employment has been placed out of purview of GST as per Schedule III of GST Act.
In the present case, the compensation which accrues to the employer is in relation to the service provided by the employee. Such compensation is related to the services not provided by him to the employer during the course of employment. In other words, the employer is being compensated for the employee’s sudden exist. Merely because the employer is compensated does not mean that any services have been provided by him or that he has “tolerated” any act of employee for premature exit.
The employee opting to resign by paying amount equivalent to month of salary in lieu of notice as part of employment agreement would not amount to any forbearance or tolerance as employee is free to tender his resignation by payment of notice period salary. Thus, the amount received by the employer does not amount to consideration as per Section 2(31) of CGST Act, 2017.
Reliance is placed on the decision of Hon’ble Madras High Court W.P. No. 35728 to 35734 of 2016 in the case of GE T&D India Ltd vs Deputy Commr. Of Central Excise, LTU Chennai -2020-VIL-39-MAD-ST that notice pay recovered by the applicant from its employees is not liable to GST.
Our Remarks:
Canteen and Transportation Facility: If such services are covered by employment contract and forms part of cost to companies, then they are not to be considered as supply. However, if they are not part of cost to company, then such services will be treated as supply and Entry No. 1 of Schedule –III will not apply. It is also important to consider provisions of Income Tax Act, 1961 on perquisites with respect to TDS to substantiate that such services are covered in employment contract.
The observations of the advance ruling authority in not treating such recoveries as consideration received in the course of business and hence, not a supply is not free from doubt. But this view can be sustained in light of the clarification already issued vide press release dated 10.07.2017 wherein it has been stressed that when the expenditure has already suffered GST and input tax credit is not availed by the assessee, then subsequent act of considering the transaction as a supply to levy GST is not to be appreciated. However, in those cases, where tax rate on output is notified subject to condition that input tax shall not be availed, the view is not free from doubt.
The AAR Maharashtra earlier in the case of Jotun India Private Limited [GST-ARA-19/2019-20/B-108, dated 04.10.2019] and Posco India Pune Processing Center [GST-ARA-36/2018-19/B-110 dated 7-9-2018] ruled that the recovery of parents health insurance expenses from employees is not subject to GST. Also, AAR, Uttar Pradesh in the case of Ion Trading India Private Limited [Order No. 41 dated 25.09.2019] held the same.
GST on Notice Pay Recoveries: The notice pay amount recovered by the employer cannot be regarded as consideration. Instead, the amount recovered is nothing but damages or compensation received by the employer from the employee. In case of notice pay, the intention of the employer is not to levy a fee or earn through employee’s breach of contract; instead the intention of employer is to impose fine on the employee for violating the provisions of the contract.
Thus, in nutshell taxability needs to be ascertained on case to case basis.
In Re_ M_s. Emcure Pharmaceuticals Limited_.pdf