GST in Transaction between Employer and Employee

Services by an employee to the employer in the course of or in relation to his employment is outside the ambit of GST as per Schedule III of CGST Act, 2017 which specifies the list of activities or transactions which shall be treated neither as a supply of goods nor a supply of services.

Therefore, any service rendered by employee during the course of employment is not leviable to GST. 

As per Schedule I of CGST Act,2017 which specifies activities to be treated as supply even if made without consideration.

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.

Hence, in case of gifts given by employer to an employee exceeding 50,000 shall be construed as a supply and shall be leviable to tax.

Conjoint reading of both the schedules gives us a simplified analysis which can be interpreted as follows:

Any service provided by employee to employer is outside the ambit of GST, however, in case of gifts given by employer to an employee in a financial year of value 50,000 or above shall be leviable to tax.

I. Treatment under GST of gifts given by an employer to its employee 

1. Gifts received by employee from employer of value equal to or more than INR 50,000.

It is leviable to GST and the transaction value shall be determined in accordance with Section 15 read with rule 28 of CGST Rules,2017 i.e., the open market value of such supply.

Treatment w.r.t ITC availment – Since, the said transaction is construed as a supply, therefore ITC would be eligible to the said employer

Note: As per industry wide general parlance, the said transaction can be determined as Free of Cost (FOC) supply as consideration is not received by the employer, therefore, another methodology of the said transaction would be non-availment of ITC on such input purchase of gift.

2. Gifts received by employee from employer of value not exceeding INR 50,000.

It cannot be construed as a supply. Therefore, it is not liable to tax under GST.

Further, as per Section 17(5) of CGST Act, 2017, ITC is restricted in case of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

II. GST on Provision of accommodation, transportation or canteen services to employees

The taxability of above captioned services provided by employer to an employee has been a serious issue ever since introduction of Goods and Services Tax (GST).

The CBIC vide Circular 172/04/2022-GST, dated July 6,2022 issued clarification regarding the liability of GST on the benefit provided by the employer to its employees in terms of contractual agreement.

As per the above captioned circular, it was clarified by the revenue that GST is not leviable in case of perquisites provided by the employer to its employee in terms of contractual agreement entered into between the employer and the employee.

Therefore, in case of canteen, accommodation, transportation services provided to employees as per employment contract or part of CTC/salary is outside the ambit of GST. ITC cannot be availed in case of the said services unless it is mandated by any law for the time being in force as the said services cannot be construed as services received in course or furtherance of business.

Question arises if the provision of said services are not mentioned in the employment letter or part of CTC/Salary, then what treatment should the employer adopt w.r.t taxability and input tax credit.

There are various pronouncements which do not provide a concrete judgment as to the taxability of the said services.

The questions which form the basis of judgement of various AAR and AAAR in respect of such services are as follows:

Whether the act of providing / facilitating such service in the course or furtherance of business or not and thereby supply under GST is the moot question here.

Firstly, can the ITC be eligible under the shelter of the proviso that its obligatory for employer to provide the canteen facility under Factories Act (if applicable to the employer)

Secondly, even if eligible, is it restricted on the grounds of personal consumption or not in course or furtherance of business.

Another stand which can be taken is that if such services are construed as a supply, therefore, the said services would be covered under the definition of “business” and as a consequence ITC could be admissible as it would be regarded as services received in course or furtherance of business.

Therefore, it is advisable to analyze the correct tax position on case to case basis.

III. GST on Payment of remuneration to director of a company 

1. There is an employer-employee relationship between the director and company, then the company is not liable to pay tax under reverse charge mechanism as the said transaction would be covered under Schedule III of the CGST Act,2017 as discussed

2. There is no employer-employee relationship between the director and company, then the company is liable to pay tax under reverse charge mechanism as per S.NO-6 of Notification No. 13/2017-Central Tax (Rate), dated 28-6-2017.

The Government issued Circular No – 140/10/2020 – GST dated 10th June 2020 regarding the applicability of GST under reverse charge mechanism in case of payment of remuneration to directors where it has been clarified by the revenue that if the part of Director’s remuneration which is declared separately ‘other than salaries’ in the Company’s accounts and subjected to TDS under Section 194J of the IT Act as ‘Fees for professional or Technical Services’ shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act and leviable to GST under reverse charge mechanism.

If TDS under Section 194J is not deducted by the company and the said director is getting remuneration as a salary i.e., TDS is deducted under Section 192 then GST would not be applicable due to establishment of employee-employer relationship.

IV. GST on Health or life insurance, travel benefits provided by an employer to its employee

ITC on such benefits provided by the employer to employee is not allowed as per Section 17(5)(b) of CGST Act, 2017 unless mandated by any law for the time being in force and said services are not leviable to tax as it would be covered under Schedule III of the CGST Act, 2017.

V. GST on Expenses incurred by the employee on behalf of his employer in course of business.

There can be various transactions where expenses are incurred by the employees on behalf of employer in connection with business.

If tax invoice issued by the supplier is in the name of employer – ITC for such inward supply would be eligible provided all the conditions as laid down in Section 16, 17 and 31 read with relevant rules are satisfied.

If tax invoice issued by the supplier is in the name of employee – ITC for such inward supply would not be allowed as it would be regarded that employee is the only recipient in respect of the said transaction and following the provisions of GST law, it cannot be regarded as an eligible credit.

As per industry practice, it has been observed that in various instances invoice is issued in the name of employee and as a result, such organisations are deprived of eligible ITC – This could turn as a tax optimization avenue for such organizations.