2021 (1) TMI 431 - AAR - GST

Export Oriented Unit liable to pay 18% GST on Notice Pay recovery despite Contract Act arguments

The Authority held that the applicant, an Export Oriented Unit, is liable to pay GST at 18% on the recovery of Notice Pay from employees not completing ... Recovery of notice pay as consideration - Agreeing to the obligation to refrain from an act or to tolerate an act - Supply of services under Schedule II, Clause 5(e) - GST liability on contractual exit paymentsRecovery of notice pay as consideration - Supply of services under Schedule II, Clause 5(e) - Whether recovery of notice pay from employees for not serving contractual notice period is subject to GST. - HELD THAT: - The Authority found that the notice pay is a sum stipulated in the employment contract for breach of the obligation to serve the agreed notice period and is therefore a mutually agreed consideration. Clause 5(e) to Schedule II to the CGST Act, 2017, declares that 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' is to be treated as supply of service. The employer's acceptance of payment in lieu of requiring an employee to serve the notice period constitutes the employer agreeing to tolerate the employee's act of not serving notice. Consequently, the transaction falls within the scope of declared services in Schedule II and attracts GST. The Authority considered prior decisions under the erstwhile service tax regime but held them not directly applicable to the GST levy, and therefore did not accept those precedents as negating GST applicability. Applying the statutory classification, the Authority concluded that recovery of notice pay is taxable as a service (classified under services not elsewhere classified) and liable to GST at the applicable rate. [Paras 11, 12, 13, 14]Recovery of notice pay from employees who do not serve the contractual notice period is a taxable supply of services under Schedule II Clause 5(e) and is liable to GST.Final Conclusion: The Authority ruled that notice pay recovered from employees for non serving of contractual notice period is taxable as a service (agreeing to tolerate an act) under Schedule II and is liable to GST; the applicant's question is answered in the affirmative. Issues involved:1. Liability to pay GST on recovery of Notice Pay from employees leaving without completing notice period.Detailed Analysis:1. The applicant, a 100% Export Oriented Unit, sought an advance ruling regarding the liability to pay GST on recovery of Notice Pay from employees not completing the notice period. The company's policy required a three months' notice or notice pay in lieu of notice period for termination, with recovery of notice pay if the employee fails to serve the notice period.2. The applicant argued that Notice Pay is a consideration for breach of contract, not a separate supply, as per the Indian Contract Act, 1872. They contended that it falls under the entry of services by an employee to the employer, not subject to GST as per Schedule III of the CGST Act, 2017.3. During the hearing, the applicant's representative reiterated their stance, citing precedents where notice pay recovery was not subject to service tax. They referenced a Madras High Court order and other case laws to support their position.4. The Authority considered the applicant's submissions, emphasizing that the CGST and GGST Acts are similar. The key issue was whether the recovery of Notice Pay attracts GST, as per the terms of the employment contract.5. The Authority noted that Notice Pay is a sum agreed upon for breach of contract, falling under the definition of supply as per Schedule II of the CGST Act, 2017. The transaction of tolerating an act (quitting without notice) for a sum (notice pay) is deemed a service under Clause 5(e) to Schedule II.6. Referring to a Madras High Court case, the Authority found that recovery of notice pay does not constitute a taxable service as it does not involve the employer rendering any service. However, the Authority held that the applicant is liable to pay GST on recovery of Notice Pay at 18% under the category of 'services not elsewhere classified.'7. The Authority distinguished the cited case laws related to service tax disputes, stating they are not directly applicable to the GST levy issue at hand. The ruling affirmed the liability of the applicant to pay GST on recovery of Notice Pay from employees not completing the notice period as per the contract.This detailed analysis provides a comprehensive overview of the judgment, addressing the legal arguments, interpretations, and findings related to the issue of GST liability on recovery of Notice Pay.