👍GST Not Applicable on Notice Pay Recovery from Outgoing Employee: AAR

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GST - Notice Pay Recovery - Outgoing Employee - Employee - AAR - Taxscan

The Haryana Authority for Advance Ruling (AAR), observed that GST is not applicable on Notice Pay Recovery from Outgoing Employee.

RITES Limited, a Government of India Enterprise was established in 1974,under the aegis of Indian Railways. RITES Limited is incorporated in India as a Public Limited Company under the Companies Act, 1956 and is governed by a Board of Directors which includes persons of eminence from various sectors of engineering and management.

Whenever the Applicant company hires an employee in the organization, it enters into an employment contract with such employee. The employment agreement of employees (other than contractual employees) states that if the employee of the company resigns from the organization, then such employee has to mandatorily serve the minimum notice period as mentioned in the said agreement.

However, in case if the employee is unable to serve the stipulated notice period, then in such cases, the Applicant company recovers an amount as Notice Pay or deducts the said amount from the salary of the employee in lieu of the notice period which has remained un-served by the said outgoing employee. It is in the nature of a compensation for the breach of the terms of the Employment Agreement.

The question before the Authority is whether the amount collected by the Applicant company as Notice Pay Recovery from the outgoing employee would be taxable under GST law and if yes, rate of GST thereupon?

The Two-Member Bench consisting of Sunder Lal, Member CGST and Kumud Singh, Member SGST observed that “CGST Act, 2017. Notice pay does not result into the provision of service by either party, it is sort of compensation either to employee or employer and not a consideration. It is a safety valve sort of option to both the parties i.e. if one of the party frustrate the employment contract either by reneging or by failing to perform. It is the employee who is the service provider and service supplied by him in the course of its employment is excluded from the definition of Supply under the GST Act.”

The Bench concluded by noting that the amount collected as Notice Pay Recovery from outgoing employee attracts nil GST.To Read the full text of the Order CLICK HERE

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In Re: M/s. Rites Limited

CITATION:   2023 TAXSCAN (AAR) 203

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