Impact of GST on Notice Pay Recovery

30 Mar, 2024

Under the employment transactions, employees offer their services and, in return, are paid and receive other non-monetary rewards. As there is a supply on both ends, the same is subject to GST as a taxable service. In accordance with contractual obligations or appointment letters, an employee is typically required to fulfil a notice period following providing notice to quit from a position. Employees are required by law to work for many private companies for a set amount of time, which can range from as less as 15 days to 3 months or even longer. The length of the notice period is determined by the employee’s position or classification at the time of the employment contract termination. The main reason for preserving this provision in the contract is to provide the employer enough time to find a replacement for the resigned employee or enable a seamless transfer of duties. The company will have to incur much additional expenditure or can also experience operational disruptions if an employee fails to adhere to this notice requirement or leaves abruptly.

Objectives of Goods and Service Tax

• To reduce the multiple documents procedure and make it easy for businesses to comply with filing procedure at the time of income tax returns filing.
• To remove the cascading effects, which were present in the indirect tax system
• To establish a common market with one single tax system to follow.
• To reduce the compliance burden
• To establish a wide tax based in the country
• Form the promotion of economic growth

What are the four types of Goods and Service Taxes?

What is Notice Pay Recovery?

An employment contract includes a notice period clause, which states that when the employee wants to resign from the job, they have to work for a mandatory period of time, which can be 1 to 3 months. This period is known as the notice period. When the employees leave the job without completing their notice period, at that time, the employer has the right to recover a specific amount as mentioned in the employment contract in return for the breach of contract done by the employee.

We can understand this with an example: if the salary of one employee is Rs 30,000 for one month, she or he has to complete the notice period of one full month, but the employee only works for fifteen days, the salary payable to the employee by the company will be only Rs 15,000 because the employee failed to complete the one month notice period and worked only for half a month. The employer can consider the recovery of Rs 15,000 in notice pay as income. The notice pay recovery amounts act as compensation to the employer for enduring the employee’s breach of contract to serve the notice period.

GST on Employee Notice Pay Recovery

The CGST Act stipulates that GST is applicable to all supplies of both goods and services. It applies to money paid by a taxable person who is registered as part of the process of doing business for consideration. On the other hand, transactions between related parties that occur without consideration but in the ordinary course of business are included in Schedule I of the CGST Act and are classified as supplies. Additionally, according to Section 15 of the CGST Act, the employer and employee are regarded as related parties. According to the CGST Act of 2017, 1 Section 7(2) (a) along with Entry 1 of Schedule III, services provided by an employee to an employer throughout the course of or in connection with his employment are not considered to be either a supply of goods or of services. As a result, employee compensation is exempt from GST.

Applicability of GST on Notice Pay Recovery

Some experts hold the opinion that notice pay recovery is exempt from GST because it happens within the course of employment. The activities that qualify as a supply of goods or services are listed in Schedule II of the CGST Act. ‘Agreeing to the obligation to refrain from an act or to tolerate an act or a situation’ is one of these activities. These actions include consenting to the duty to refrain from doing something or tolerating someone else’s behaviour. There can be different opinions on this:

• It could be argued that an employee is receiving notice-period pay even though they didn’t follow the employer’s specified notice period. Failure to give notice results in tolerance of an employer’s conduct. Therefore, the recovery of notice pay is subject to GST.
• Suppose the commitment to tolerate the employee’s conduct is not included in the notice pay policy. Then, these notice pay recoveries are exempt from GST.

Conclusion

There are a few cases where the notice pay recoveries are exempted from GST, like the case of M/s. Gujarat State Fertilizers & Chemical Ltd and M/s. HCL Learning Systems v/s CCE Noida. There are different views on the GST of notice of pay recovery. Some say GST should be imposed; on the other hand, some say it should be exempted.