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Tax talk: Employee contracts need to be re-worded post GST

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Updated: April 24, 2018 2:53:12 AM

Consideration, whether in cash or otherwise, paid to employees, termed as Cost to Company (CTC) for work done during employment, is exigible to income tax and not indirect taxes.

Cost to Company, GST legislation, gst law, AAR, GST on employer employee transactions, post gstCompanies reimburse their employees for necessary and reasonable expenses incurred for official duties.

Tanushree Roy

Consideration, whether in cash or otherwise, paid to employees, termed as Cost to Company (CTC) for work done during employment, is exigible to income tax and not indirect taxes. In terms of the GST legislation, consideration paid by an employer to the employee (i.e. salary) for rendering services in the course of employment would not be liable to GST. However, the GST law does not provide clarity in cases where the employer reimburses certain expenses to its employees that are outside the purview of the employee’s CTC or recovers certain expenses for facilities provided to employees. Such transactions largely remained untapped from the tax net due to absence of specific provisions in the erstwhile regime.

Reverse charge

Companies reimburse their employees for necessary and reasonable expenses incurred for official duties. Where such reimbursements do not form a part of the CTC of the employee and such procurements are made from a registered vendor, no GST would be payable as appropriate tax has been paid by the employee (given that he was merely facilitating the transaction) on procurement of such supplies. But, the question arises that whether the employer is liable for any tax to be paid under reverse charge on such expenses, if same is procured from unregistered vendors. In this regard, it is pertinent to note that government has deferred the reverse charge mechanism for supplies received from unregistered persons till 30 June 2018.

Another issue which arises for consideration is the implications under GST if the employer is providing certain amenities/ facilities to the employee and at the same time, recovering the entire/ partial cost from the employee? Say the employer organises an offsite for its employees and recovers Rs 20,000 from each employee, however, actual cost incurred by employer is Rs 35,000 per employee. Such transactions would amount to supply from employer to employee and GST wouSld be leviable.

It is interesting to note that GST might become payable on full value of Rs 35,000 instead of Rs 20,000 being the open market value in the instant case (employer and employee being ‘related person’ in terms of the GST legislation, GST is charged on the taxable value which would usually be open market value for supplies between related persons). Similarly, food is provided to employees and the amount is recovered from their salary.

In this regard, recently the Authority for Advance Ruling (AAR), Kerala has ruled that food expenses recovered from employees for canteen services provided by company would come under the definition of ‘outward supply’ and therefore, shall be treated as a taxable supply under the GST law. This also opens a pandora’s box wherein charges received by employers from employees such as medical insurance, transportation, uniform charges, phone bills etc. could come under the purview of GST. An interpretation may also be taken that the employer should be entitled to the input tax credit of the GST so charged by the vendors in making the taxable supplies, to its employees.

The analysis of leviability of GST on employer employee transactions is more complex than it appears. GST law is still in its nascent stage and varying interpretations on complex GST provisions is likely leading to the authorities taking a pro revenue approach in the absence of judicial precedence in this regard. It is the need of the hour that each transaction between employee or employer be analysed on case to case basis and existing employee contracts be re-worded to ensure that there is no tax loss.

The writer is director Nangia & Co LLP. Inputs from Himanshu Arora

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