Notice-pay received from outgoing employee is subject to GST, holds AAR – Times of India

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MUMBAI: Contracts with employees provide for furnishing a notice period, which typically ranges between one to three months.
Many companies permit an employee to leave without serving the notice period, provided he or she pays a certain amount to the company (this generally equivalent to the salary of the notice period).
The GST Authority for Advance Rulings (Gujarat bench) has held that such sum given by an outgoing employee, in lieu of serving the notice period, is a consideration to the employer for ‘tolerating the act’ of not serving the notice period.
The company would be liable to pay Goods and Services Tax (GST) at 18% under the entry – ‘Services not elsewhere classified’ on the sum of the notice pay received from its employees.
Amneal Pharmaceuticals, a private company, had sought an advance ruling on whether it is liable to pay GST on recovery of notice pay from employees who are leaving the company, without serving the notice period.
The company contended that no GST was payable as it is an adjustment of salary, it flows from the employment contract and is not a ‘supply’.
For GST to apply, there needs to be a supply of goods or services for a consideration. The company relied on earlier judicial decisions (which were given in the context of the erstwhile service tax laws) to support its argument.
However, the AAR stated that Clause 5(e) of schedule II of the Central GST Act provides that ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’ is a supply of service.
The outgoing employee can exercise the option of paying the notice pay as the consideration for the employer to agree to the obligation of letting him go, which the latter is bound to do. It also held that the decisions which the applicant had relied upon related to litigation under the service tax laws and did not hold good in the context of application of GST laws.

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