notice pay recovery under gst

 

What is Notice Pay recovery

 

Whenever an employee joins or leaves an organisation, he/she is bound by the terms of employment. An employee is usually required to serve the agreed notice period before he/she resigns. But, most of the employee agreements have a clause stating that if an employee wants to leave the company without serving the agreed notice period, then he is required to pay an amount equal to the unserved notice period.

 

This is called notice pay recovery, which is either recovered from the employee or deducted from the salary payable to him

 

It’s still a part of litigation that GST is liable to pay on notice pay recovery or not as some of the rulings passed in the favour of the assessee

 

As some professionals are of the view that as notice pay recovery is in the course of employment, the same is also exempt from GST. But it should be noted that Schedule II of the CGST Act states certain activities that shall be treated as a supply of goods or services.

 

Such activities include ‘Agreeing to the obligation to refrain from an act or to tolerate an act or a situation as prescribed under Schedule II, Entry No. 5(e) of the CGST Act, 2017, which is a deemed supply of services under Section 7 in the said Act. To this, there can be a different point of view:

 

Ø It could be contended that an employee receives the notice period pay for not serving the notice period prescribed by the employer. The action of not serving the notice period leads to tolerating the act of an employer. Thus, GST is applicable to notice pay recovery.

 

Ø In case the notice pay policy does not contain such agreement for tolerating the act of an employee. Then, such notice pay recoveries are not subject to GST.

 

This is a long-pending issue and needs clarification from the GST authorities. Taxpayers can make representations to seek clarification, as this is a prevalent issue. There are also a few crucial decisions made in favour of the assessee stating that such notice pay recoveries are not subject to GST:

 

1.   Order of Commissioner (Appeals) in case of M/s. Gujarat State Fertilisers & Chemical Ltd – It held that cessation of employment is treated as an employment service and not liable for the GST.

 

2.   Allahabad CESTAT in case of M/s. HCL Learning Systems Vs CCE, Noida – It held that the amount recovered out of salary already paid is not subject to GST.

 

In re Syngenta India Limited (GST AAR Maharashtra), Advance Ruling No. GST-ARA-25/2020-21/B-05, dated 19/01/2022- it is held that recovery of notice period pays from the employee not serving full notice period is not liable to GST.