Payback tax on employees leaving companies: GST ruling

Payback tax on employees leaving companies: GST ruling

A high attrition rate has taken centre stage in the corporate world because of a talent war among companies. The tax treatment of employees serving the customary notice period is a topic of debate among tax officials and companies.

A recent ruling in the case of Bharat Oman Refineries, which is a subsidiary of state-owned Bharat Petroleum, said the GST will be applicable on different employee recoveries, as per the Central Board of Indirect Taxes and Customs' Authority of Advance Ruling AAR.

Phone bills are paid by companies, group insurance of company employees, and payment of salaries on serving the notice period, according to The Economic Times. The government charges a tax on any activity viewed as a supply of service. These services can be direct or indirect, as per the definition of GST.

The ruling said that if an employee is leaving a company and serves the notice period, it's the company that provides services to the employee.

In a similar order passed by the Gujarat Authority of Advanced Ruling in July 2020, the GST authority had ruled that the applicant is liable for the GST on recovery of notice pay from employees leaving the company without completing the notice period as per the contract entered between the employer and the employee.

The order was passed on an application by Amneal Pharmaceuticals Pvt Ltd, Ahmedabad. The applicant is liable to pay GST at 18 per cent under the entry of services that are not elsewhere classified, a recovery of notice pay from employees who are leaving the company without completion of the notice period. The authority went through the case-law of Gujarat State Fertilizers Chemical Ltd 2016 where it was held that the cessation of employment should not be treated as an employment service not liable for service tax. It has also been perused the decision of Allahabad CESTAT in the case of HCL Learning Systems Vs CCE, Noida, where it was held November 2019 that when amounts are recovered from salary already paid, such amounts would not be subject to service tax as salaries are not subject to tax.