Haryana AAR: No GST on Notice Pay Recoverered from Resigned Employee

The Haryana Authority of Advance Ruling (AAR) held that the notice pay recovered from resigned employees does not attract Goods and Service Tax (GST). The AAR observed that the notice pay recovery from the employees who resign and leave the company without serving the mandatory notice period is not a consideration for any supply or service.

The applicant is a multi-disciplinary consulting organisation dealing in transportation, infrastructure, and related technologies. The applicant enters into an employment contract with that employee whenever it hires an employee.

The employment agreement states that if an employee resigns, such an employee must serve the mandatory minimum notice period. However, suppose the employee cannot serve the stipulated notice period. In that case, the applicant recovers an amount as notice pay for the unserved notice period. 

The applicant has sought an advance ruling on whether GST will be charged on notice charges received when an employee cannot serve the notice period as mentioned in the employment contract.

The CBIC issued a circular dated 3rd August 2022, clarifying that the notice pay paid by employees for not serving the mandatory notice period won’t fall under consideration for any supply or service.

Accordingly, the AAR held that notice pay does not result in service provision by either party. It is compensation to the employee or employer, not a consideration. It is a safety valve option for both parties, i.e., if one of the parties does not follow the employment contract either by revoking or failing to perform. Hence, the employee is the service provider, and services supplied during his employment do not fall under the supply under the GST Act.

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