(Last Updated On: June 27, 2018)

Employee contracts: Companies getting notices for GST payment

Video Tutorial by CA Satbir Singh (Voice in Hindi , Slides in English) explaining GST on Termination of Employee Contracts

Due to lack of clarity over the goods and services tax, information technology (IT) and information technology-enabled services (ITeS) companies have received notices for GST payment on employee contract transactions such as

Pay deduction during the notice period,
Termination fee and
Bond recovery

The grey area over taxability in such cases continue in the GST regime as in the service tax regime, where employers received notices demanding payment of service tax on the amount received as notice pay from employees.

“We have received a notice over non-payment of GST for the amount received as payment from employees in the form of bond payment or notice pay. It is a grey area and the government must issue a clarification on it soon,” according to an IT company executive.

As per Schedule II of GST Act 2017 , agreeing to the obligation to refrain from an act is treated as supply of Service

SCHEDULE II

[See section 7]

ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES

5. Supply of services

The following shall be treated as supply of services, namely:—

…..

(e)

agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and

Argument against the GST on Termination of Employee Contracts

In a number of private firms, employees are bound by contracts to serve notice period. In case the employee does not serve notice period, a part of the salary is withheld.

“Transactions such as notice pay, termination fee and bond recovery arise out of the employment contract, and are not subject to GST. Authorities are likely to be apprehensive as to whether these activities will fall under refraining acts.

It should be noted that refraining acts are not invoked in cases of contingencies, but are agreed in advance