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GST on supply between employer and employee

Introduction- supply between employer and employee in GST

Employers and employees are related persons under the GST Law. Supply between employer and employee may attract the GST. Here we will analyze the linking of various GST provisions with these kinds of transactions. 

  • Explanation to section 15 defines the related person.
  • Schedule I deem every transaction between the related or distinct person as a supply. Even if there is no consideration.
  • Schedule III excludes the supply by an employee to the employer from the GST scope. It deems it as no supply.
  • Advance ruling in case of Caltech polymers made the supply by the employer to employee, taxable in GST. Even if there is no consideration.

supply between employer and employee

Services by an employee to the employer in the course of or in relation to his employment.

It is a very important term in the entire taxability of Employer-employee transactions. Most of the businesses sign a formal agreement with the employees. In those cases, we can simply refer to the employment agreement to check whether a particular service is as per the employment agreement or not. On the other side of the coin, it is important to redraft the employment agreement from the GST point of view. There may be some transactions not directly covered by the old agreement. But now every possible task by an employee is supposed to be covered by the agreement. 

Then there are scenarios where the formal agreement is not entered between the employer and employees. In this case, the tasks covered by the employment requirement will be ascertained case to case basis. 

Yes, any service by an employee, not in relation to employment will be out from Schedule III, entry 1 protection. It may fall in taxability.

Example: Mr. Ram Sampat is running a music company. His employee Mr. Devraj belongs to the city of Chamba. Mr. Sampat decided to stay in Chamba in the farmhouse of Mr. Devraj. He paid the daily rentals for stay and food. This supply is not in relation to employment. As the employee is otherwise also engaged in some profession. In this case, it will be taxable subject to the turnover limit for registration and tax payment. 

Example: Mr. Suresh Gupta is employed by M/s Sun dry to dye white clothes. He belongs to a village famous for bee honey. M/s Sun dye procured 100 KG of honey from him. He also supplied 100Kg of Raw cotton and Cashews to the company. These transactions are not in relation to his employment. If other conditions fulfill, they may fall in taxability.

GST on FOC services by the employer to employees

Every employer wants to retain good employees. They provide various services to create comfort for the employees. These services can be free food, Pick and drop, health and medical benefits, and many more. Most of the time these services are free of cost. Now the question arises for their taxability. Whether we need to consider these transactions as taxable. 

Entry no. 2 of Schedule I will have an impact here. Any transaction between the related person, even if it is without consideration. We need to consider two facts here. Whether it is a supply but for no consideration charged by the employer. 

The other aspect can be the reciprocal benefit for the services provided by an employee. e.g. An employee is sitting in the office till 10. The employer is providing him with meals for his late sitting. Now, this meal is a supply by the employer or it is a consideration for the late sitting of the employee? 

Here we need to consider the agreement between the two. It is better to include these transactions in the agreement for employment to remove any future litigation. In that case, it is covered by employment, and the services by the employer can be treated as a benefit in place of money for the services of an employee. 

GST on services when some amount is charged by the employer

Now the second case is where the services by the employer are not on a FOC basis. In this case, some amount is charged by the employer.  Generally, the reason for collection is not the monetary benefit but to keep an eye on the transactions. But in this case rule, 28 will also be in the picture. 

As per Rule 28, in this case, the value of the transaction will be as per the provisions of Rule 28. Even if an invoice is raised, the amount of the invoice is not relevant for the taxability. This will again pose an issue.

Example-

M/s Tata tele provides lunch to all employees having a salary of less than Rs. 20000 per month. They charge a nominal amount of Rs. 10 per meal. They purchase these meals from Haldiram @100Rs. per plate. In this case, applying the provisions of Rule 28 of CGST Rules, the value will be Rs. 100 or more. It will attract a tax on Rs. 100 (Assuming it is the value as per Rule 28). 

GST on notice pay by the employer

Notice pay is the salary paid for the notice period when it is not served. In the case of an employer, when the employee is terminated and a notice period is not provided. The employer is liable to pay the salary for the notice period. Now the question arises whether the amount paid by the employer is liable for GST. It is an amount paid for the service agreement. 

In this case, there is no supply by the employee to the employer. But he has borne the consequences of termination. Whether it can fall under the definition of supply? Schedule II provides that forbearing a loss is a supply of service. 

But the question is whether it is a supply? Because Schedule II will be relevant only after that. 

GST on notice pay by the employee

In the reverse case, when the employee leaves the job and doesn’t serve the notice period. He may also be liable to pay compensation to make good the losses caused to the employer. In this case, since there are no services provided by the employer to the employee, GST shall not be applicable.

GST on services by employer 

Sometimes the employee avails the supply provided by the employer in the ordinary course of business. Here we can’t take a plea that it is for employment purposes. It will be taxable at the normal tax rate. If it is sold at some concessional rate then rule 28 may also come into the picture.

Example- 

Tata Sons offered a discount of 20% on all cars for its employees. Mr. Tekatrel took the benefit and bought one tata Hexa. This transaction is chargeable to GST.

 

Profile photo of CA Shafaly Girdharwal CA Shafaly Girdharwal

CA

New Delhi, India

CA Shaifaly Girdharwal is a GST consultant, Author, Trainer and a famous You tuber. She has taken many seminars on various topics of GST. She is Partner at Ashu Dalmia & Associates and heading the Indirect Tax department. She has authored a book on GST published by Taxmann.

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