Guide to Goods and Services Tax on Employee reimbursements

Transcription

1 Guide to Goods and Services Tax on Employee reimbursements

2 FCA, LLB, DISA P a g e 2 Contents 1. Introduction Who is an employee Services of employee are not Supply of goods or services GST on various kinds of considerations / reimbursements given to an employee in the course of his employment GST on various kinds of considerations / reimbursements given to an employee in relation to his employment Supplies from employer to employee GST on employee Purchases Implications of certain important transactions Disclaimer... 18

3 FCA, LLB, DISA P a g e 3 1. Introduction GST has opened a series of debate on many issues in India regarding the levy of GST. Amongst many, one of the most deliberated issues has been the levy of GST on provision of goods or services to or by employee or reimbursements made to employees. The foregoing guide explains the underlying facts of the transactions, provisions of the GST law and exigibility of such amounts (paid between employer / employee) under GST. 2. Who is an employee An Employee has been defined by many dictionaries, some of the definitions are as under: - someone who is paid to work for someone else one employed by another usually for wages or salary and in a position below the executive level - Another site, defines an employee as a person who is hired to provide services to a company on a regular basis in exchange for compensation and who does not provide these services as part of an independent business. It is important to note that while employee includes whole time and Managing Directors, Independent directors are not employees of the Company. Similarly, contractual labour would also not be categorised as employee. Persons who

4 FCA, LLB, DISA P a g e 4 are engaged on exclusive secondment can be categorised as employee, provided their employment is shifted from the principal employer for the period of secondment. 3. Services of employee are not Supply of goods or services As part of Schedule III of Central GST Act, 2017 ( CGST Act ), Services of employee has been considered as neither supply of goods, nor supply of services. The relevant portion of the CGST Act reads as under: Section 7: (2) Notwithstanding anything contained in sub-section (1), (a) activities or transactions specified in Schedule III; or.. shall be treated neither as a supply of goods nor a supply of services. Schedule III 1. Services by an employee to the employer in the course of or in relation to his employment. Accordingly, any services by an employee in the course of or in relation to his employment shall not be considered as Supply and shall not be exigible to GST. It is pertinent to mention that any activity which is not a supply for the supplier shall also be taken in the same spirit for the recipient and thus, no GST is payable on such amount under reverse charge as well. The exclusion is to all services when they are undertaken in the course of or in relation to his employment. Thus, we should first understand what constitutes in the course

5 FCA, LLB, DISA P a g e 5 of or in relation to. The two terms are not new and have been deciphered by the Courts. We shall now proceed to discuss the levy on the various kinds of considerations / reimbursements given to an employee hereunder. 4. GST on various kinds of considerations / reimbursements given to an employee in the course of his employment The phrase in the course of employment contemplates an integral relation or bond between the services provided by the person and the contract of employment. Services provided by such person are inextricably linked up with the terms of employment and are originating and are binding only in terms of hum being employed. Thus, any supply of service which is in pursuance of the contract of employment shall be said to be provided in the course of employment and shall be outside the purview of employment. The major components of consideration paid to an employee for services in the course of his employment include Basic Salary, Allowances and Perquisites. We shall discuss the same hereunder Basic Salary Basic Salary and all components of Salary including Allowances and Perquisites are paid in lieu of services of employee in the course of his employment and thus are not taxable under GST.

6 FCA, LLB, DISA P a g e Allowances Allowances include three categories of allowances allowances forming part of Salary, compensatory allowances, allowances for official duties. We shall discuss each of the three categories hereunder: a. Allowances forming integral part of Salary The various kinds of allowances as are included in Salary are as under: - House Rent Allowance - Children Education Allowance - Hostel Expenditure Allowance for children - Any allowance paid or allowed by Government to its employees posted outside India - Allowances to Judges of High Court/Supreme Court - Compensatory allowance received by a Judge under article 222(2) of the Constitution - Salary and allowances received by a teacher /professor from SAARC member state - Fixed Medical Allowance - Tiffin/Lunch /Dinner/Refreshment Allowance - Dearness Allowance - Overtime Allowance - Telephone Allowance - Holiday Allowance - Any Other Cash Allowance forming part of Salary

7 FCA, LLB, DISA P a g e 7 Since the above allowances form part of Salary for services provided in the course of employment, they are not exigible to GST. It is important to mention that the above allowances forms part of Salary for the purpose of Income Tax. b. Compensatory Allowances Following Compensatory allowances are also not exigible to GST and have been recognised as only a form of Salary: - Transport Allowance is granted to an employee to meet expenditure on commuting between place of residence and place of duty - Special compensatory Allowance (Hilly Areas) - Border area allowance / Tribal area allowance / Compensatory Field Area Allowance / Compensatory Modified Area Allowance / Counter Insurgency Allowance / Underground Allowance / High Altitude Allowance / Highly active field area allowance / Island Duty Allowance / City Compensatory Allowance - Allowance granted to an employee working in any transport business to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another place provided employee is not in receipt of daily allowance - Entertainment Allowance received by the Government employees c. Official Allowances Certain allowances are given to employee for official expenditures and are not taxable to the extent such expenses are made for official purpose, such as: - Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office

8 FCA, LLB, DISA P a g e 8 - Any Allowance to meet the cost of travel on tour or on transfer - Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty - Helper/Assistant Allowance - Research Allowance granted for encouraging the academic research and other professional pursuits - Uniform Allowance In above cases, the expenses are made in official capacity and the above expenses are not for personal consumption of the employee. They are paid in lump sum to provide flexibility to certain employees to expend money within a particular range for business purpose so that they are not short of funds and business in not hindered in its natural course. Thus, in above cases, employee acts a agent of the employer for such expenditure and such allowances are considered as business expenses and not part of the Salary to the extent such expenses are for official purpose. Accordingly, portion of Salary which relates to official purpose shall be considered as expenditure by employer and GST implications should flow as if employer has made such expenses. It is immaterial whether the invoices are in the name of the employee or employer. However Input tax credit can only be availed when proper GSTIN of employer is mentioned on such invoices. Also, in case of procurement of such supplies from unregistered supplier, the liability to pay under reverse charge shall fall on employer. Thus, it is proper to records such expenses when said to be expended on official purpose. In other case, when such amount is not used for official purpose and paid to employee, such amount forms part of taxable Salary of the employee and thus, no GST shall be applicable on such amounts.

9 FCA, LLB, DISA P a g e Perquisites The following perquisites being a part of Salary are not taxable in GST not being a Supply: - Rent Free Accommodation - Supply of Gas Water, Electricity etc - Free or Concessional Educational facilities of employee s family members. - Income Tax of Employee - Professional Tax of employee - Salary of servant employed by employee - Reimbursement of Medical Expenditure - Free meals provided during office hours - Club Facility - Leave Travel Concession - Telephone / Mobile - Medical / Recreational Facilities - Stock options - Education/ Training or refresher course for employees - Car Provided by Employer for personal use of employee While, such supplies to employee are only a form of consideration for employee services, procurement of such supplies from any unregistered supplier would make employer exigible for payment of GST under reverse charge. It is important to mention that certain supplies like rent free accommodation are exempt under GST and thus, no GST is payable under reverse charge also.

10 FCA, LLB, DISA P a g e 10 It is important to mention that even though the provision of such goods/ services shall not constitute supply between employer and employee, however, any payment made by employer for procurement of such supplies from a third person would attract GST and in case such supplier is not registered, the employer would be required to pay GST under reverse charge. For eg. Car taken on rent from a third party and given to employee shall be exigible to GST in the hands of employer. 5. GST on various kinds of considerations / reimbursements given to an employee in relation to his employment There are many considerations which are given to an employee which are beyond his term as an employee and may not fall within the ambit of in the course of employment, but such amounts shall not be exigible to GST when they are in relation to employment. Type of such amounts are as under: a. Pension and other retirement benefits: b. Earned leaves c. Ex-gratia payments d. Leave Travel Concessions 6. Supplies from employer to employee Another important question which needs to be answered is whether the provision of goods / services from employer to employee shall constitute Supply and whether such supply shall be exigible to GST. In terms of perquisites, no supply is made by an employer when employer makes such goods / services

11 FCA, LLB, DISA P a g e 11 as perquisites to employee. In these cases, the supply is made by the persons supplying such goods / services and are enjoyed by employee while payment is made by the employer. However, since the same are procured in the course of his business, when such supplies are procured from unregistered supplier, employer shall be bound to pay tax on such expenditure. Gifts from employer It is important to mention that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. Thus, provision of gifts at the time of any function / festival when such gift does not exceed Rs 50,000 per employee per annum, shall not be considered as Supply. Provisions by employer as supplier However, when the employer provides any other goods / services in his own capacity, such provisions shall be categories as Supplies and employer shall be liable to pay GST on such supplies. Some of the examples of such supplies include: - Transfer of movable assets after a certain period of use for no consideration or at a value which is below fair market value of such goods - Goods / Services which is provided by employer as part of his business to his customers and such services are also provided to employees free of cost / at concessional price - Use of Immovable / Movable Assets for personal use of employees

12 FCA, LLB, DISA P a g e 12 In above cases, employer has to discharge GST under forward charge as a supplier. It is important to mention that the supply may not have proper consideration and thus, the tax shall be paid at fair market value as provided in Determination of Value Rules. Provision to all employees The following services being provided to all employees shall not fall within the ambit of taxability: Transaction GST Implication Remarks Group medical /Personal Accident insurance taken by Company for all / certain class of employee Health Check up Facility No individual benefit, accruing only to an employee, no GST on such benefit when given on employees No individual benefit, accruing only to an employee, no GST on such benefit when given on employees Company pay for insurances and invoice raised by insurance company to company. Company organise health check up for their employees and GST is charged by vendor if applicable

13 FCA, LLB, DISA P a g e 13 Free Food to Employees by appointing caterer Food on payment basis by company to employee No Supply by Company as no intention of employer to supply such services to employees as supplier. Part of employee perquisites. Company supplying food to employee, liable to pay GST Company pay to caterer and caterer supply foods to employees and subsidised cost. No Input Tax Credit to Company Caterer charges Company GSt on its supply of services which shall be available to Company as Input Tax Credit 7. GST on employee Purchases It is a general practise whereby the employees purchase goods or services on behalf of their employers, for example, travel and food expenses when are away on business, buying fuel, expending for other business needs etc. Amount can be used from imprest given to employee, corporate credit given to him or such expenses can also be claimed back as reimbursements. GST when invoices are in the name of the Employer When the invoices for such expenses are in the name of the employer, it is amply clear with both parts that GST has to be borne by the employer. If the supplies are received from registered supplier, the Input tax credit shall be

14 FCA, LLB, DISA P a g e 14 received by the employer when GSTIN of employer is mentioned properly on the invoice. In case of unregistered supplier, the employer has to pay GST under reverse charge. GST when invoices are in the name of the Employee Since the expenditure is made by employee, in many cases it is found that such invoices are issued in the name of employees and thus, even when purchased from a registered supplier, the invoice is not in the name of the employer. 8. Implications of certain important transactions We shall now discuss the various expenditures which are made by employees on behalf of employer and claimed as reimbursements and GST treatment thereof: Transaction GST Implication Remarks Cab Facility provided to employee for to and from home by engaging a third party Cab provider No Supply by Company as no intention of employer to supply such services to employees as supplier. Cab provider charges company GST, else reverse charge applicable on Company. No Input Tax Credit available to Company Mobile handsets to employees for official purpose No GST as no supply. Property used by employee for official purpose. However, when transferred to Input Tax Credit available to Company

15 FCA, LLB, DISA P a g e 15 employee, constitute supply shall Mobile bill reimbursement when bill in the name of employee Since they are procured for official purpose from a registered supplier, a position may be taken that such expenses are not taxable under GST Sale of Used Fixed Assets - Old Laptops/Vehicles etc sold to employee GST Applicable on such supply of goods to employees Input tax may not be reversed if GST is paid on output supply Gift to Employee - Diwali Gift, Birthday Gift Etc In case of value of such Gift exceeds Rs 50,000/- p.a. GST is applicable No Input tax credit on such gifts can be availed by Company when no tax is paid on output supply Company Car to Employees for official use GST not Applicable as no supply. Car made available for official use No Input tax credit on Car available to Company. Payment of GST to third person if such car or services is received from such person. No Input tax credit on such input services.

16 FCA, LLB, DISA P a g e 16 Company Car to Employees for both official and personal use GST may be Applicable as car is supplied for use other than business and thus, GST may be charged. If however, same is considered as part of Salary and perquisite is made taxable under Income tax, no GST. No Input tax credit on Car available to Company. Payment of GST to third person if such car or services is received from such person. No Input tax credit on such input services. Employee Referral Fees amount paid to employee for referring another person for employment in Company GST applicable as procurement from unregistered supplier Notice Pay recovery - Notice pay recovered from employee leaving company GST to be paid on amount recovered as Notice pay by the Company Long Service Award - Company provided award for long service GST applicable if not forming part of salary

17 FCA, LLB, DISA P a g e 17 Guest house accommodation - Guest house is always a commercial property and a license has to be taken GST Applicable, valuation shall be considered at fair market Supply of Uniform official use No GST GST charged by supplier of uniform to Company and shall be available to Company as Input tax credit Product / Services of company given to employee at discounted rates GST applicable on fair market Value Employee Own Car reimbursement when used for official duty Company has to deposit GST under reverse charge considering employee as unregistered supplier

18 FCA, LLB, DISA P a g e Disclaimer Due care and diligence have been taken while editing and publishing of this Guide. The author does not hold any responsibility for any mistake that may have inadvertently crept in. The author shall not be liable for any direct, consequential, or incidental damages arising out of the use of this Guide. In certain parts of the Guide, the views expressed are personal views of the author and are no authority in law. To avoid any doubt, readers are suggested to cross check the contents with original government publications. The Guide is based on the understanding as envisage above. If there is any change in the understanding, our comments may vary significantly. This Guide is restricted to issues under GST on employee consideration / reimbursements. No other direct or indirect tax issues have been examined. The comments in this memorandum are purely a matter of interpretation and not binding. The tax authorities may take a different view. The author has no responsibility to update this Guide, unless specifically requested. This Guide is based on the statutory/legal positions including judicial and administrative interpretations thereof prevailing upto and inclusive of the date of the Guide. This Guide is solely for the information purpose. The Guide may not be used for any other purpose, or distributed to any other party, without prior written consent.

19 FCA, LLB, DISA P a g e 19 Gaurav Gupta All rights reserved CA Gaurav Gupta B.Com (Hons.), FCA, LLB, DISA Partner MGS & Co. No part of this publication may be reproduced or transmitted or stored in any form or by any means including but not limited to electronic, mechanical, scanning, photocopying, recording, or stored in any system for use of any nature without the written permission of the author. Breach of any of the above conditions is liable for legal action.