In GST, there are several issues coming before the taxpayer regarding taxability. One of the issues is the amount recovered from an employee and retained by the Employer, while leaving the employment without servicing the period mentioned in the agreement, generally called Notice Pay.
What is Notice Pay?
At the time of joining the employment, as per contractual agreement between employer and employee, it is mentioned that an employee, when resigning, from the job has to serve a notice period for specific time. Say 1/2/3 months.
If the employee fails to serve such a notice period, the salary for the notice period not served is recovered and retained by the employer.
The question arises is whether such retention of Notice pay is taxable under Goods and Service Tax?
Legal provisions under GST
As per Section 7 of CGST Act, 2017 as amended the definition of Supply is
Scope of supply. — (1) For the purposes of this Act, the expression “supply” includes —
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business; [and]
(c) the activities specified in Schedule I, made or agreed to be made without a consideration
[(1A) where certain activities or transactions, constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.]
(2) Notwithstanding anything contained in sub-section (1), —
(a) activities or transactions specified in Schedule III; or
(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services
(3) Subject to the provisions of [sub-sections (1), (1A) and (2)], the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as —
(a) a supply of goods and not as a supply of services; or
(b) a supply of services and not as a supply of goods.
As per Schedule II (Activities [Or Transactions] To Be Treated As Supply Of Goods Or Supply Of Services)
Clause 5 (e) “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”
As per Schedule III (1)
Services by an employee to the employer in the course of or in relation to his employment.is neither goods nor supply.
Case Laws
It is said that the employer is tolerating of act of employee , hence it is taxable under GST.
Before deciding the taxability under GST, we will see the position in Service Tax. A similar situation arose in Service tax. There the department has issued demand notices for recovery of Service tax on Notice pay recovered by the employer.
- In the case of, GE T & D India Limited, the Deputy Commissioner of Central Excise has issued SCN for demand of Service tax on Notice pay recovered by the Company under Section 66(e) “whereby agreement by an entity to the obligation to refrain from an Act or to tolerate an Act or a situation, or to do not act, would constitute taxable service.” The Company has filed the Writ petition before Chennai High Court. In the said writ the High Court observed that
“—-the employer cannot be said to have rendered any service per se much less a taxable service and has merely facilitated the exit of the employee upon imposition of a cost upon him for the sudden exit. The definition in clause (e) of Section 66E as extracted above is not attracted to the scenario before me as, in my considered view, the employer has not ‘tolerated’ any act of the employee but has permitted a sudden exit upon being compensated by the employee in this regard.
Though normally, a contract of employment qua an employer and employee has to be read as a whole, there are situations within a contract that constitute rendition of service such as breach of a stipulation of non-compete. Notice pay, in lieu of sudden termination however, does not give rise to the rendition of service either by the employer or the employee.”
The writ petition is allowed and demand is set aside.
(GET & D India Limited Vs Deputy Commissioner of Central Excise writ petition before Chennai HC W.P.Nos.35728 to 35734 of 2016)
2. In another case of HCL Learning Systems Vs CCE, Noida 2019 (12) TMI 558-CESTAT Allahabad
It was held that notice pay recovery is out of the salary already paid. It is to be noted here that salary is not covered under the provisions of service tax.
Conclusion
A similar entry in Section 66E(e) of the Finance Act, is there in Entry No. 5(e) Schedule II of the GST law under the definition of ‘supply’ given under section 7 of the CGST Act, 2017 as amended as mentioned above. Hence, the rationale of the above decisions applies under GST too. Therefore it can be said that GST is not liable on Notice pay recovery.
Accordingly, GST may not be applicable on amount of Notice pay.
Happy Learning !!!
Disclaimer : This article is for informative purposes and not to be considered a legal advice.
May 08, 2020 - Blog - Sanjay Burad
