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Treatment of transactions with employees in GST

 Treatment of transactions with employees in GST

Treatment of transactions with employees in GST is one of the most contentious issue in GST . Corporates find out new ways to retain their employees. In GST how the transactions between an employee and employer will be treated? This is very important and complex also. Let us discuss it with provisions of Law itself and legal precedents we have till now.

1.    Whether a transaction between employer and employee is a supply?

a.    Supply by an employee to employer: Supply by an employee in course of his m is out of the preview of GST. Schedule III of CGST Act covers this case. The provision of the schedule is reproduced here:

Entry 1 of CGST Act: Services by an employee to the employer in the course of or in relation to his employment.

b.    Supply made by an employer to an employee: Supply made by an employer to an employee will be a supply under GST. We can divide it in following two scenarios.

                                              i.    When the employer charges consideration: When the employer charges the consideration it will fall under supply. Here it is important to understand whether the transaction is a supply or it is just a mode of payment of compensation for employment service rendered by the employee. Whether that perquisite was covered in employment agreement. Here the observation of advance ruling authority in case of M/s. Caltech Polymers Pvt. Ltd is worth mentioning.

Relevance of AAR in case of M/s Caltech Polymers Pvt. Ltd.

 In this advance ruling the authority observed that activity of providing food to its employees would fall under the supply. The Caltech polymers was doing following activities to provide food to its employees:

a)   The space for the canteen is provided by the Company, inside the factory premises.

b)  The cook is employed by the Company and is paid monthly salary.

c)   The vegetables and other items required for preparing the food items are purchased by the Company directly from the suppliers.

d)  The number of times, the Canteen facility is availed, each day, by the employees is tracked on a daily basis.

e)   Based on the details above, the expenditure incurred by the Company on the vegetables and other items required for preparation of food is recovered from the employees, as a deduction from their monthly salary, in proportion to the foods consumed by them.

f)    The company does not make any profit while recovering the cost of the food items, from the employees. Only the actual cost incurred for the food items is recovered from the employees.

The authority for advanced ruling observed that

The term “business” is defined in Section 2(17) of the GSTAct, which reads like this:- “business” includes:- (a) any trade, commerce, manufacture, profession, vocation, adventure, wageror any other similar activity, whether or not it is for a pecuniary benefit: (b) any activity or transaction in connection with or incidents! or ancillary to sub-clause (a); …

From the plane reading of the definition of “business”, it can be safely concluded that the supply of food by the applicant to its employees would definitely come under clause (b) of Section 2(17) as a transaction incidental or ancillary to the main business.

                                             ii.    When employer does not charge consideration: In the case where the consideration is not charge by the employer. It may get covered in Schedule I. The relevant provision of schedule I is reproduced here:

Entry 2 of Schedule II

“Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:

Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.”

As the provision state the supply by an employer to an employee will be a supply even is it is without consideration. But then proviso came in rescue for the gifts upto the value of Rs. 50,000.

Q.1: Whether the gifts upto Rs. 50,000 are neither a supply of Goods nor services or it is an exempt supply?

View: The entry 2 of schedule I provide the list of items which will be deemed as supply. When a proviso is inserted into it to remove a specific item from supply, It will render that item neither a supply of goods nor services. We can say that for the purpose of GST it will not be a supply at all.

 Q.2 Where the value of gift is more than Rs. 50,000 whether the entire value of gift will be the value or only the value above Rs. 50,000 will be considered?

View: As we can see from the language of provision, it says “Gifts not exceeding” meaning thereby that gifts exceeding Rs. 50,000 will not be eligible for the benefit of this proviso.

Q.3 This relief of Rs. 50,000 is cumulative for all employees or it is per employee.

View: The provision has used the word “an employee” so we can say that it is per employee.

 

2.    Eligibility of ITC for inward supplies used in making supplies by an employer to employees.

As we discussed in AAR above, supply of food items to employees was considered as supply. Now the question arises whether the input tax credit for inward supplies used in making those supplies will be available to the employer or not. In this particular case because the supply was categorized in entry no. 6 of Schedule II. The entry is reproduced here:

“supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such –supply or service is-for cash, deferred payment or other valuable consideration.”

There two provisions which talk about the above supply. Section 17(5) (b)(1) restricts the input tax credit to some specific items. The provisions state that:

“food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply.”

In this case employer was making a composite supply. ITC will not be blocked for this provision. Another provision which cover this specific situation is Entry 7 of Notification no. 11/2017 CTR. This entry blocks the input tax credit for the supplies covered in above entry no. 6(b) of schedule II of CGST Act.

Thus the ITC of abovementioned inward supplies will not be available. But if it was not covered in above provision, The ITC should have been available. It will be important to look at all the relevant provisions while deciding about the Input credit eligibility. In one case it may not be available but in other it may be.

AAR in case of M/s National Aluminium Company Ltd. Odhisha AAR authority observed the following.

The applicant is not entitled to the benefit of input tax credit of tax paid on various inputs or input services received for maintenance & repair work of the townships, guest houses, hospitals etc for the following reasons:

a)   The input, and /or input services received by the applicant for the activities such as maintenance and repair of the townships, guest houses, hospitals and horticulture have no nexus to the manufacturing activity undertaken by the applicant The said activities are neither relating to business nor relating to manufacture of final product and its supply The said activities may be welfare activities undertaken while carrying on the business but to qualify as input service; the activity must have nexus with the business of the applicant. The expression “in course or furtherance of business” appearing in Section 16(1) of the GST Act refers to activities which are integrally related to the business activity and not welfare activities.

b)   As per clause (c) and (d), and the Explanation thereto under sub-section (5) of section 17, the tax credit on “works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service” is not allowed or blocked Further, the tax credit on “goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business” is blocked. From a plain reading of the provisions of the above referred sub-clauses along with the Explanations, it reveals that the tax credit on input and /or input services received by the applicant for the referred activities are in the form of works contract service, for repairs and maintenance of various immovable property and assets, the input tax credit of which are directly restricted or blocked under specific provision under section 17 of the OGST/CGST Act.

c)    Establishing, maintaining and furnishing guest houses including landscaping by way of gardening or otherwise is neither a perquisite nor a statutory obligation. It is purely for providing accommodation service to guests including employees on tour. This is in fact a business requirement to maintain such facilities and accordingly the applicant is entitled to input tax credit of the tax paid on inward supply of input and input services for maintenance of the guest house, transit house, and training hostels, but excluding the food and beverages provided in such establishments. Credit of such input services are as such blocked in clause b of Sub section 5 of section 17 of the OGST and CGST Act. In the case of the applicant, the listed services do not contain any catering service, but the application seeks for a ruling even on such service. It is further clarified that, the applicant might not be charging anything from the guest or the trainees for providing food and beverages in the guest houses and training hostels and in such case the inputs used for preparing the food and beverages or input catering services shall not qualify for input tax credit.

d)   Plantation services: On scrutiny of the services listed in Annexure-A against which the current ruling is being issued, it was found that the applicant is availing services for plantation both inside the plant area as well as outside the plant area. Some of the contracts are for urban plantation in Koraput and annual plantation in unspecified area. Such services are definitely not in the course of or for furtherance of business. It may be obligatory for the applicant to undertake such plantation, but certainly not a business requirement. Hence, plantation and maintenance of such plantation outside the plant area being for non business use will not qualify for input tax credit in terms section 17(1) of CGST and OGST Act

e)    Similarly, services for maintenance of plant and gardens within the residential colony and other public utility created by the applicant will form part of the residential colony and in turn part of the perquisite provided to the employees. Services availed in relation to the plants and garden in the residential colony will not qualify for input tax credit for the reasons discussed in para 5.0. It was also found that the plantation and maintenance of gardens are undertaken within plant area and other business establishments like administrative building and guest houses. Services availed in relation to plantation and gardening within the plant area including mining area and the premises of other business establishment as mentioned above will qualify for input service credit. 

This AAR has clarified about the availability of input tax credit for supplies made to employees. In some cases it is not observed to be in course or furtherance of business. There is a little contradiction in both of above rulings. In the first case the food supply is a supply, but in second one the supply of residential accommodation is not a supply. Also section 17(5) c & d denies the credit only when an expanse is capitalized. Repairs, if expanse off in P&L they should not be disallowed under section 17(5) as explanation to same section provide that construction will cover the expanses capitalized in BoA.

Still these AAR have provided us with some guiding principal for supplies by an employer to an employee.

We will enhance this discussion with more updates in provisions.

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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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