By S Sivakumar, Advocate, K Vidhyashree, Advocate and R Vaidyanathan, Consultant
AS per Schedule III of the Central GST Act, 2017, services by an employee to the employer in the course of or in relation to his employment will not be treated as supply of goods or services. Thus, the salaries and other allowances that are paid by the employer to the employee, as part of the employment contract are outside the purview of GST. Also, all reimbursements of expenses incurred by employees, in the course of their employment, would be outside the levy of tax under GST.
The employer and the employees are deemed to be ‘related persons’, in terms of Section 15(5) of the CGST Act. As per Entry No.2 of the Schedule I to the CGST Act, supply of goods or services or both between related persons when made in the course or furtherance of business would be subject to levy of tax under GST even when they are made without consideration. Moreover, as per Schedule I, gifts exceeding Rs 50,000/- in value in a financial year by an employer to an employee shall be treated as supply of goods or services or both.
Given the above, we can discuss certain specific issues concerning the GST law, as it applies to transactions between the employer and the employees.
Notice pay recovery by employer – in our view, this would be subject to levy of tax under GST, as this is a supply of service effected by the employer to the employee and the employer would be liable to pay tax under GST. This issue is being litigated under the current service tax regime, as well.
Referral bonus paid to employees – this cannot be treated, in our view, as a payment made to an employee in relation to his employment and would consequently be subject to levy of tax under GST. Since the employee would not be registered, the employer may be liable to pay tax under the reverse charge mechanism.Though there can be acontrary opinion that, these services are to be treated as employment related payments and consequently, no tax can be levied under GST, it would be difficult to justify this point of view.
Mediclaim and personal accident policy related payments by the employer –it is common for companies to take group Mediclaim policies covering the employees and their dependents. While in some cases, such premiums are treated as part of the employee’s salary calculated on a cost-to-company basis (‘CTC’), in some other cases, the employer treats such premium as a business expense. It is also very common for employees to be covered for personal accidents, etc. under a group policy wherein the premium is paid by the employer. In some cases, the employer directly pays or reimburses the expense incurred for annual check-up, etc. In our view, since these benefits are extended to employees in relation to their employment, tax cannot be levied under GST.
Providing subsidized food or free food – in many cases, the employer maintains a canteen or deploys an external caterer to provide free or subsidized food to the employees. Except in cases where food is to be provided by the employer (in terms of Factories Act, 1948, or employees working in night shifts, Call Center, etc) whether under any statute or as part of the employment contract, tax would be leviable on all other free or subsidized supplies of food . When the employer provides free food, the employer would be liable to pay tax. When the employer provides food at concessional rates, the difference between the cost incurred by the employer and the amounts recovered from the employees, could get subjected to the levy of tax under GST.
Joining Bonus paid by employer – would be exempt, as this would be in the nature of a payment made to the employee in relation tohis employment.
Incentives/performance bonus – In many cases, the employees get performance related payments and incentives and all of these payments would be exempt under GST as these are paid to employees, in relation to their employment.
Usage of car and other assets etc. for personal purposes – many employers allow employees to make use of the company assets like car, laptops, etc. for their personal purposes in addition to official purposes. In some cases, the employer allows the employee to use the car procured under a hire purchase or leasing arrangement, for personal purposes. Since the car is also used for personal purposes, the employee would be liable as the recipient of supply, to pay tax. Since the employee would not be registered as a taxable person, the employer could be liable to pay tax under reverse charge mechanism . The determination of the value of this supply would be extremely complex and would need to be based on the actual costs incurred by the employer, based on the valuation rules. Under the Income tax Act, the usage of the company car by the employee is treated as a taxable perquisite and is subjected to the levy of income tax at very nominal rates. However, for levy of tax under the GST law, the income tax law based valuation may not be relevant. Our view is the same for usage of other company assets by the employees, for their personal purposes.
Sale of company assets at concessional rates – It is more or less settled under the VAT law that sale of assets of the company (e.g., used car, computers, furniture, etc.) would be treated as a ‘sale’ within the meaning of the VAT law. In our view, these transactions would attract tax under GST on the basis of the prevailing market values of these assets.
‘Gift’ payments made to employees – all payments which are not in relation to the employment are to be subjected to tax under GST, except for festival (eg. Diwali) gifts, for which, an exemption up to Rs 50,000/- per employee per year has been provided for.The term ‘gift’ has not been defined under the GST law and consequently, even cash payments can be treated as gifts, especially when these are given on account of Diwali etc. Thus, Diwali gifts given in cash would also qualify for exemption, subject to the limit of Rs 50,000/- per employee per person.
Free pick-up and drop facility – Many employers provide pick up and drop facility to their employees. While in many cases, these benefits are provided free of cost to the employees, in some cases, the employer subsidizes the cost of this supply. In many States, for women employed in the night shifts, it is mandatory for the employer to use cabs to pick up and drop these employees working in night shifts. In our view, these transactions would be outside the purview of levy of tax under GST, as these are to be treated as being provided to employees , in the course of employment or in relation to employment as these supplies cannot be treated as not being in relation to employment, whether the employment contract specifically covers these benefits or not.
Interest free loans provided to employees – It is common for some companies to provide interest free loans to employees to pursue specific higher education courses or attend specified training sessions or for meeting personal exigencies. Since these are financial transactions (with no ‘supply’ involved), tax is not leviable under GST.
Service awards – it is common for companies to pay specified amounts to employees who have completed specified years of service. Employees are given either cash or gifts, on these occasions. In our view, no tax would be leviable, as these are to be treated in relation to employment.
Uniforms, shoes, etc . – in many factories, uniforms, shoes, soaps, etc. are given to workers. In our view, no tax is leviable under GST.
Sponsorship and training related expenses – it is also common for companies to sponsor their employees for specified training programmes, sometimes, in a foreign country. Since these payments are made in relation to the employment, no tax is leviable under GST.
Usage of company guest house by employees – some companies allow their corporate guest houses to be used by their employees for personal purposes, eg. during vacation, etc. In our view, this facility cannot be treated as being related to the employment especially, as the employees’ families would also be allowed to use the guest house. The Employer would be liable to pay tax under GST and the valuation could be based on the actual costs incurred by the employer.
Recoveries made by the employer towards parking fee, etc – these payments would be subject to levy of tax under GST and these payments cannot be treated as being related to the employment. The employer would be liable to pay tax as this cannot be treated as being in relation to employment.
Outing expenses incurred by employees – in a place like Bangalore, it is very common for employers to allow their employees to organize parties, celebrations, etc. (with or without purpose). It is common for the team leaders to incur these expenses and then claim reimbursement from the employer. In some cases, employers take their employees (with or without families) for tours or excursions. In our view, no tax is leviable under GST, as these are to be treated as being in relation to employment . In some large multinational companies, it is also common to have beer parties during specified weekends, involving employees, with the expense being borne by the employer. In our view, no tax can be levied under GST, as these too are to be treated as being incurred in relation to employment.
Claims for reimbursements, etc from employees for all business expenses – since all of these payments are for the purposes of business and are related to the employment, there would no levy of tax under GST.
Payment of club related fees – if these payments can be treated as business/official expenses, no tax would be leviable on the amounts reimbursed to the employees. However, for any payments for personal use by the employees, the employer would be liable to pay tax under GST
Payments to consultants – since consultants cannot be treated as employees, all payments made by the employer to the consultants would be liable to tax under GST and the employer would be liable to pay tax under reverse charge mechanism in all cases where the consultants are not in the tax bracket under GST.
Gratuitous payments by the employer – in our view, any payments that are not related to employment, eg. Diwali /festival gifts, etc. would be covered by the exemption of Rs 50,000/- –irrespective of whether these are paid in cash or in the form of goods (eg. gold coins).
ESOP related payments – in our view, no tax would be leviable under GST on these transactions, as these are to be treated as transactions covered by the employment contracts, apart from being financial transactions.
Relocation/transfer related payments – no tax would be leviable under GST, as these are to be treated as part of the employment.
Providing rent free accommodation – since this benefit is provided as part of the employment contract, no tax would be leviable under GST.
Payments to trainees, apprentices, etc – since trainees and apprentices cannot be treated as employees, these payments will be subjected to the levy of tax under GST and the employer might be liable to pay tax under reverse charge mechanism.
Sitting fee paid to non-executive Directors – would be covered under Reverse Charge Mechanism, requiring the employer to pay tax under GST.Payments made to executive Directors would be exempt from the levy of tax under GST.
Since most employees would be treated as unregistered suppliers within the meaning of Section 9(4) of the CGST Act, employers would be required to pay tax under the reverse charge mechanism in respect of transactions where the employees are treated as the outward suppliers. Apart from being a huge procedural requirement requiring the employer to upload these details in his GSTR 1 return, the employer would also be required to reverse the ITC on common input services with the value of these services being treated as ‘exempted services’ under Section 17(3) of the CGST Act, in respect of cases which are covered under the reverse charge mechanism under Section 9(4) of the CGST Act.
There is little doubt that the employer, as the taxable person, would be eligible to avail of input tax credit, on the tax paid by him in respect of employee related transactions except for specified transactions like premium paid on Mediclaim policies. Companies would be well advised to plan their employee related activities in such a manner that ITC is available including routing these transactions through intermediaries. Similarly, companies could look at the possibility of having the outdoor caterers to directly supply food to the employees and raise invoices on the companies and companies can take a view that they are not engaged in any ‘supply’ of good to the employees.
This area is likely to see a lot of litigation under the GST law, to the utter delight of Advocates and Consultants. The very process of determining the employer’s liability could be onerous requiring a workable knowledge of accounting and employment policies and it would seem that most companies are ill-equipped to handle this challenge, especially, with regard to valuation of these supplies.
Note : This Article was carried on by Taxindiaonline.com website on 26th June 2017