26 August 2019

Conundrum of employer-employee relation – HR policies and GST implications

by Astha Sinha Nirav Sanjay Karia


Flow of consideration in any form to an employee from his employer has always been a subject of dispute as far as taxation laws are concerned. While exemption from indirect taxes on services provided by the employee to the employer is well codified, there is always ambiguity in the reverse transaction due to deeming provisions in taxation laws. The situation has become grave with the “related party” status provided to the “employer-employee” relationship under the GST regime. The thumb rule that activities covered under “perquisites” do not attract GST has not remained relevant anymore.


When an employment contract is signed between an employer and employee, there are various facets to it besides merely the job description and compensation component. The employer agrees to provide various services/facilities/amenities to its employee during the course of employment and the employee also agrees to certain code of conduct. This includes bus services, food services, gifts, notice pay conditions, etc. Monetary recoveries are made for some of these services while others are provided free of cost as a part of employment services.

Position under Service Tax regime
Under the service tax regime, Section 65B (44) of the Finance Act, 1994 defined the term “Service”, which explicitly excluded “provision of service by an employee to the employer in the course of or in relation to his employment”. Also, there was no deeming provision treating an employer and employee as a related party.
Thus, the thumb rule was that if any service provided by the employer was a part of the perquisites of the employee, then the same would not be subject to service tax. Issues such as “Notice Pay” were also contested in various cases where the same was disputed as a service of “Agreeing to tolerate an act”. Recent decisions provided clarity on the said issues as well.

Law under the GST regime

However, the GST regime changed the game on taxing such transactions. While there exist clear exemption entries under Schedule III of the CGST Act for services supplied by an employee to the employer, the same cannot be said about the services supplied by the employer to the employee.
Explanation to Section 15 of the CGST Act defines an employer and an employee to be “Related Persons” for the purpose of GST. This deeming provision comes with its own set of implications. Related party transactions are tricky in nature as anything and everything, either with or without consideration, become subject to GST at appropriate valuation as per the valuation rules. 
When the law was introduced to this effect, the questions arising in every company’s mind was whether they would have to pay GST on the ‘free bus services’ provided to the employees or whether GST would be attracted on the ‘corporate gifts’ given to the employees on a regular basis. With no clarity, this deeming provision seemed draconian to the companies.
Amidst the said uproar, GST Authorities released a GST Press Release dated July 10, 2017 with respect to “Gifts provided to employees”. As per the same, it was clarified that gifts upto Rs. 50,000/- given by employers to employees shall be exempt from GST. Further, services provided by the employer to the employee shall not be subject to GST provided the same were provided to all the employees of the company and appropriate GST was paid by the employer at the time of procurement. 

This lead to two-fold implications to be considered. First, the eligibility of credit on services procured by the employer and second, the GST implication on services provided by the employer to the employee.

However, it may be noted that this still did not bring about any synergy between the HR departments and Tax departments of the companies. HR department has, from time immemorial, formulated their standardised policies with some consultation with the income tax team, if any. This shall have to change in the new era of GST. It is becoming imperative for the HR department to seek advice from their indirect tax department about their existing and proposed policies.
Policies such as bus services, canteen services, mobile rxpenses, housing allowance/provisions, insurances, car lease policy, issue of coupons, education assistance policy, policies on deputation, loan policies to employees and notice pay recovery are just some of the policies that require analysis from the GST perspective.

Attention is invited to recent ruling passed by Authority for Advance Ruling in the case of Posco India Pune Processing Centre Private Limited, wherein the authority held that input tax credit shall not be eligible on GST paid for hotel stay in case of rent free hotel accommodation provided to General Manager (GM) and Managing Director (MD). Further, it was held that recovery of parent’s health insurance expenses from the employee does not amount to “supply of service”.

Further, in the case of Caltech Polymers Pvt. Ltd., the authority held that that recovery of food expenses from the employees for the canteen services provided by company would come under the definition of ‘outward supply’ as defined in Section 2(83) of the Act, 2017, and therefore, taxable as a supply of service under GST.
While these issues have still been addressed by the authorities, most issues related to HR policy have still have no precedent in the GST regime.

An example of the same is “Car Lease Policy”. Let us take an example of a company having the policy of providing different types of cars based on rank and designation of the employees. This usually forms part of the CTC and the rental of the same is deducted from their salary. There is no precedent on such transactions under the GST regime, however, it demands analysis under GST.

Similarly, notice pay recovery has been a disputed topic since the erstwhile regime. In the service tax regime, there were precedents both for and against the said notice pay recovered from employees. And this was the scenario when employer-employee relationship was not treated as “related party” and money flow had to be proved as a valid “consideration” for the supply of service. There are no precedents on this issue in the GST regime. The issue arises because with the related party provisions and Schedule I of the CGST Act, even if the pay does not qualify as “consideration” towards “Agreeing to tolerate an act”, the same may still be subject to GST. 

Final return and impact of ambiguities
With everyone is busy finalising the reconciliation between their books of accounts and GST returns, the issue of GST implications on various HR policies may create an issue. With no clarity on the GST implications of the same, a lot will be dependent on the audited statements to filed as GSTR – 9C.

Attention is drawn to the language used in the declaration of GSTR – 9C which states that the information given is “True and correct” to the registered person’s knowledge. This is different from the general accounting difference of information being “True and fair” to one’s knowledge.

This minute difference at first glance may not hold much significance, but one can wonder whether this declaration of “True and correct” will impact future litigation on these issues. If a third-party auditor does not identify the issues on GST implications on HR policies, will an enquiry by the department two years later attract penalty or will they be absolved due to such a declaration, is not clear.

There are many open-ended questions on this front, and the only way to safeguard the company from such litigation is to turn back and have one last look at the HR transactions before filing of the final returns.

In conclusion, it is emphasised that it has become imperative for all companies to delve into their HR policies to analyse any possible GST implications of the same. HR policies like car provided to employees, medical assistance, mobile phones given to employees, guest house services, notice pay recovery, training, etc., have to be minutely scrutinised in light of the deeming provisions under GST law. While solace is provided by the press release released by the GST department, one may wonder as to the authority of the same. Would the same hold its ground against the exposure created by the deeming provisions of GST law or will the company be dragged into litigation? Either way, the companies should be prepared for such scrutiny in the future.

 [The authors are Senior Associate and Joint Partner, respectively in Tax Practice, Lakshmikumaran and Sridharan, Mumbai]


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