Gujarat AAR - Employee to pay GST in case of not serving notice period
In a somewhat surprising turn of events, on January 12, 20201 the Gujarat Authority for Advance Ruling (“AAR”) in the matter of M/s. Amneal Pharmaceuticals Private Limited (“Ruling”) held that in case an employee leaves without serving the notice period (and a clause in the employer-employee agreement contains aspect relating to recovery of notice period amount from the employee), then the same can be claimed by the employer along with 18% goods and services tax (GST) as per Central Goods and Services Tax Act, 2017 (“CGST”).
The AAR in arriving on the said Ruling relied upon the interpretation of a ‘taxable service’ under section 7(1) of the CGST which defines the term supply as sale transfer, barter, exchange etc. of goods and services. In this Ruling, the AAR observed that the notice pay is an amount to be paid by the employee breaching terms and conditions of employment. As per the AAR the said payment can be categorised as “tolerating the act” of an employee and hence levy of GST is thus justified.
Hence, employees need to be aware that in case they resign without serving notice period, some employers may try and recover their notice pay along with GST.
As per the CGST, levy of GST depends upon the “test of supply”. Therefore, according to the Ruling notice pay by itself constitutes a supply as per CGST. If we have a closer look at the employment agreements signed by parties, obtaining notice pay in no case appears to be the primary objective. Further, per clause I of schedule III of the CGST, ‘services by an employee to employer in the course of or in relation to his employment’ are out of the purview of GST. Although, the provision does not include services to the extent of consideration by way of salary. It only implies that any other considerations paid to employee usually in the course of business may fall under this clause.
Taking all aspects into consideration it appears that ‘notice pay’ should not attract GST as per CGST. In fact, the Allahabad CESTAT in the matter of M/S HCL Learning Limited (with reference to service tax) held that “notice pay recovery is out of the salary already paid and we also note that salary is not covered by the provisions of service tax. Therefore, we set aside the impugned order and allow the appeal”. As already stated under CGST the services by an employee to the employer in the course of or in relation to his employment are covered under Schedule III of the CGST. Thus, it appears that salary may not have any implications under CGST law also. Therefore, the cited case law could be applied in the notice pay recoveries in GST regime.
What might be of further interest is that various employment laws also provide for recovery of dues for erring employees. These adjustments can be made from their full & final settlements which amongst others includes gratuity. Hence, it can be seen that rather than a ‘service’, the ‘notice pay’ is more a recovery of an amount.
Further, although not in the scope of tax adjudicating authorities, will GST still be applicable in case the termination pay itself is disputed? Will GST still be applicable in case the salaries and certain other payments of employees are withheld by the employer as payment in lieu of ‘notice pay’? These include situations wherein the termination of the employee might be a long or habitual absenteeism or wherein the employees allege or proves that the working culture or environment (e.g., not paying salaries on time to employees). Will the aspect of ‘not serving notice period’ be taken into consideration? Or will be employer avoid the same as employee might always claim that he wanted to serve his notice but was constrained to leave.