GST on employee notice pay recovery – All you need to know

Introduction

An employee provides services in exchange for a salary and other non-monetary benefits under employment transactions. So there is supply at both ends, and thus the same should be taxable under GST. Let’s talk about GST effects on employee notice pay recovery, GST Applicability on Notice Pay Recovery, and treatment of GST on employee notice pay recovery. However, prior to learning about GST on employee recoveries, you must first understand GST (Goods and Service Tax).

Useful insights on GST (Goods and Service Tax)

GST stands for goods and service tax. The Goods and Services Tax (GST) is a value-added indirect tax levied on most goods and services sold for domestic consumption. The GST is paid via GST Return by consumers, but it is remitted to the government by the businesses selling the goods and services.

4 types of Goods and Service Tax (GST)

In India, there are four types of GST levied on goods and services, which are as follows:

• Central Goods and Services Tax (CGST) – The CGST is levied by the Central Government of India on transactions involving goods and services within a state.
• State Goods and Services Tax (SGST) – The SGST is levied by state governments in India on transactions involving goods and services within a state. It is levied in addition to the CGST.
• Union Territory Goods and Services Tax (UGST) – The UGST is levied by India’s Union Territories on transactions involving goods and services within their borders. It is levied in addition to the CGST.
• Integrated Goods and Services Tax (IGST) – If a transaction involving goods and services takes place between two states, the government will levy the Integrated GST, which also applies to imports and exports. The IGST taxes are split between the center and the states.

Insights on employee notice pay recovery

When an employee joins or leaves an organization, the terms of employment apply. Before resigning, an employee is usually required to serve the agreed-upon notice period. However, most employee agreements include a clause stating that if an employee wishes to leave the company without serving the agreed-upon notice period, he must pay an amount equal to the unexpired notice period. This is known as notice pay recovery, and it is either recovered from the employee or deducted from his / her salary.

What is the treatment of GST on employee notice pay recovery?

All supplies of goods and services are subject to GST under the CGST Act. It applies to an amount paid for consideration and in the course of doing business by a registered taxable person. Schedule I of the CGST Act, on the other hand, includes transactions treated as supplies even if they are made without consideration between related parties but in the course of business. Furthermore, Section 15 of the CGST Act states that the employer and employee are considered related parties.

Thus, even if a supply is made without consideration by an employer to an employee, it is subject to GST (except gifts up to INR 50,000). Schedule III of the CGST Act, on the other hand, states that “services by an employee to the employer in the course of or concerning his employment” are not considered a supply of goods or services. As a result, GST does not apply to employee compensation.

GST Applicability on Notice Pay Recovery

As previously stated, employment services are exempt from GST. As a result, some professionals believe that because notice pay recovery occurs in the course of employment, it is also exempt from GST. However, it should be noted that Schedule II of the CGST Act specifies which activities are considered a supply of goods or services.

Among these activities is ‘agreeing to the obligation to refrain from an act or to tolerate an act or a situation.’ There may be different points of view on this:

• It could be argued that an employee receives notice period pay for failing to serve the notice period specified by the employer. Tolerating an employer’s action results from failing to serve the notice period. As a result, GST applies to notice pay recovery.
• If the notice pay policy does not include such an agreement for tolerating an employee’s behavior. Then, such notice pay recoveries are exempt from GST.

Conclusion

Companies who have been deducting GST from recovered funds may decide to stop doing so by writing a letter to the department outlining their justifications and citing favorable judgements as to why they are not required to pay tax. They may also ask the department to confirm their understanding. By doing this, it would be impossible to demand tax on such recovery along with interest sustainably and penalties. Companies earning minimal or marginal recoveries may stop collecting from employees in order to take a safer posture. Instead, these services could be provided on a complimentary basis as part of the employment contract.