Authority for Advance Ruling in the State of Maharashtra ruled that GST shall not be levied on recoveries made from employees for parental health insurance and towards notice pay. The authority in another States have ruled accordingly in past. But the findings in this ruling are worth taking note of.
Read about the findings related to notice pay recovery in the case M/S. Syngenta India Limited, AAR-Maharashtra reported as 2022 (1) TMI 903 below:
Highlights
No Supply [Covered under Schedule 3]
- The words “as such” used in the definition of supply u/s 7 indicates the character of the transactions. Other dissimilar form of supply cannot be covered therein.
- Notice pay recovery is nothing more than deduction of the salary of the employees. Therefore, the same is an integral part of the salary benefits and deduction which is provided in the course of employment services. Hence, GST will not be payable on such recovery made by the Applicant.
No forbearance or tolerance of an act
- The employee opting to resign by paying amount equivalent to month of salary in lieu of notice, has acted in accordance with the contract and that being the case no question of any forbearance or tolerance does arise.
No role played by employer
- The resignation by the employee is not subject to any acceptance or approval and employee is free to tender his resignation, make payment of notice period salary to leave. Hence, there is neither any activity nor any passive role played by the employer.
Not a Consideration. It is a Compensation for breach of Contract
- There is no consideration within the meaning of Sec.2(31)(b) of the CGST Act, 2017 flowing from an act of forbearance in as much as there is no breach of contract, as a question of any consideration for forbearance would arise in case of breach of contract.
No intention to enter into agreement for Notice Pay
- On perusal of the employment agreement, it can be clearly inferred that it is not the case that the agreement is entered into for providing notice pay terms and conditions. Hence, the agreement should be appreciated in its true spirit and to construe that the agreement is to provide the employment services by employee to the Applicant.
Our Remarks
- The issue is a widely contested issue.
- 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.
- The decisions rendered in services tax regime has also been relied upon by the AAR.