AAR: Employees Should Pay GST on Recoveries During Notice Period

The talent war among companies led to a high attrition rate in the corporate world. However, tax officials and companies are mulling on the tax treatment on employees’ salaries serving the notice period. The Authority of Advance Ruling (AAR) ruled in the case of Bharat Oman Refineries, a subsidiary of state-owned Bharat Petroleum, that the GST will be applicable on different employees’ recoveries.

The recoveries include telephone bills paid by companies, group insurance of the employees, and salaries on serving the notice period. The AAR ruled that if an employee is resigning from a company and serves the notice period, it’s the company that provides services to the employee. As per the definition of GST, the government charges a specific tax on any activity viewed as “supply of service”.

In a similar order passed by the Gujarat AAR in July 2020, the GST authority had ruled that the employee is liable to pay GST on recovery of notice pay from the employees leaving the company without completing the notice period. 

The order was passed on an application by Amneal Pharmaceuticals Pvt Ltd, Ahmedabad. The AAT said the applicant is liable to pay GST at 18% under the entry of services not classified elsewhere, on recovery of notice pay from the employees leaving the company without completing the notice period.

The AAR concluded after going carefully through Gujarat State Fertilizers & Chemical Ltd (2016). It ruled that the cessation of employment should also be treated as employment service and is not liable for service tax.

It also perused the decision of Allahabad CESTAT in the case of HCL Learning Systems Vs CCE, Noida, that recoveries deducted out of salary paid would not attract service tax as salaries are not subject to tax.

For any clarifications/feedback on the topic, please contact the writer at dvsr.anjaneyulu@cleartax.in