GST on recovery of Notice Pay from employees while leaving job 

Introduction of GST law in India has been nightmare for many people due to complexities and confusions revolving around it. GST has brought many provisions which are new for Indian taxpayers. One of such area is the taxability of transactions taking place between employer and employees. In our previous article on “GST implication on canteen facilities provided to employees”, we have discussed this aspect in detail.

Read this article at following link: - GST implication on canteen facilities provided by employer to employees

Under GST, services by an employee to the employer in the course of or in relation to his employment shall not be treated as either supply of goods or supply of services. Hence, any payment made by an employer to employee in terms of employment contract will not be liable for GST. Any perquisites provided by employer to employee in terms of employment contract shall not be liable for GST. The same view has also been affirmed by Press Release dated 10^th July 2017 which iterated that common facilities provided commonly to employees without any recovery would not be subject to GST. Hence, services by an employee to employer is outside the purview of GST but not vice versa. 

It means that if employer makes any recovery from employees against any act, such recovery may be subjected to GST. This view has been confirmed recently by Gujarat Advance Ruling Authority while pronouncing ruling in the matter of M/s Amneal Pharmaceuticals Pvt. Ltd.

Issue before Advance Ruling Authority

Whether the applicant is liable to pay GST on recovery of Notice Pay from the employees who are leaving the company without completing the notice period?

Brief Facts of the case: -

The applicant is a 100% EOU engaged in manufacturing of pharma products.  The appointment terms of the employees clearly provided a 3 months’ notice period which is mandatory for all employees. In case, the employee does not serve the notice period after resignation, the company is entitled to recover the notice pay from the employee to compensate the loss to the company.
The applicant submitted that the Notice Pay recovery is nothing but the amount stipulated in the employment contract for breach in serving the stipulated notice period. Since notice pay is a sum mutually agreed by the parties for breach of contract it can be regarded as a consideration flowing from the employment contract itself read with section 74 of the Indian Contract Act, 1872 and not under any other separate contract wherein employer has agreed to refrain from doing any act against the concerned employee.

They further submitted that Entry No. 1 of Schedule III of CGST Act provides that ‘services by an employee to the employer in the course of or in relation to his employment shall not be regarded as supply of goods or supply of services.” Notice Pay recovery is nothing but a deduction from the salary payable to the resigning employee. It is not a separate consideration flowing from any independent contract. Notice pay recovery is nothing but an adjustment of salary and hence, does not tantamount to any supply which is chargeable to GST.

Finding & Decision of Authority: -

Notice Pay is a sum mutually agreed between the employer and the employee for breach of contract. It can be regarded as a consideration to the employer for “tolerating the act” of the employee to not serve the notice period, which was the employee’s agreed contractual obligation.

Clause 5(e) to Schedule II to CGST Act 2017, states that ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’ shall be treated as supply of service. While signing the appointment letter, the employee has understood and accepted the condition that in the contingency of his inability to provide the prescribed notice period, he can exercise the option of paying the notice pay as the consideration for the employer to agree to the obligation of letting him go, which the employer is bound to do as it is part of the terms and conditions already agreed to and settled between them. In our view, therefore, this transaction of the employer agreeing to the obligation of tolerating an act (quitting without any advance notice by the employee) will be covered under Clause 5(e) to Schedule II to CGST Act, 2017, as a declared service.

In view of the above, it is held that the applicant is liable to pay GST @ 18% under the entry of “services not elsewhere classified” on Notice Pay recovery.