2022 (1) TMI 903 - AAR - GST

GST not payable on employee recoveries for parental insurance or notice pay under CGST Act

The court held that GST is not payable on recoveries made from employees towards providing parental insurance as it does not amount to supply under the ... Scope of 'supply' under Section 7 of the CGST Act - Services by an employee to the employer treated as neither supply under Schedule III - Declared supply: agreeing to the obligation to refrain from an act or to tolerate an act (Schedule II, clause 5(e)) - Consideration in relation to supply including monetary value of any act or forbearance - Employee recoveries and characterization as consideration or compensation - Advance ruling precedent and consistency in tax treatment of employee recoveriesEmployee recoveries and characterization as consideration or compensation - Services by an employee to the employer treated as neither supply under Schedule III - Advance ruling precedent and consistency in tax treatment of employee recoveries - GST liability on recoveries from employees towards parental insurance - HELD THAT: - The Authority examined the facts that the applicant facilitates parental insurance offered by a third-party insurer, pays the premium to the insurer and recovers the premium from employees without any profit element. The Authority relied on its earlier rulings in comparable matters (M/s Jotun India Pvt. Ltd. and M/s POSCO India Pune Processing Centre Pvt. Ltd.) where recovery of parental health insurance premium from employees was held not to amount to 'supply' under Section 7 of the CGST Act. Noting that providing parental insurance is not the business of the applicant and the insurer provides the service, the Authority found no reason to depart from those precedents. Applying the statutory scheme, the Authority concluded there is no supply by the applicant to employees in respect of parental insurance recovery and therefore no GST is payable. [Paras 5]GST is not payable on recoveries made from employees towards parental insurance.Scope of 'supply' under Section 7 of the CGST Act - Declared supply: agreeing to the obligation to refrain from an act or to tolerate an act (Schedule II, clause 5(e)) - Services by an employee to the employer treated as neither supply under Schedule III - Consideration in relation to supply including monetary value of any act or forbearance - GST liability on notice pay recoveries from employees for not serving full notice period - HELD THAT: - The Authority considered the applicant's contention that notice pay is compensation for breach of employment contract and not consideration for any service, and examined the applicability of clause 5(e) of Schedule II (forbearance/toleration) and Schedule III (services by employee to employer). It reviewed relevant precedents and the analysis of other Advance Ruling bodies and appellate authority decisions, including the reasoning in the MPAAAR and the Madras High Court in GE T&D, which treat compensation linked to employment as related to services by the employee and therefore outside GST under Schedule III. The Authority found that where the contract permits resignation on payment of notice pay and no forbearance or active toleration by the employer is shown, there is no distinct supply by the employer; the recovery merely compensates for non-provision of services by the employee and does not constitute consideration for a taxable forbearance. Relying on that reasoning and prior AAR decisions, the Authority concluded that notice pay recoveries are not liable to GST. [Paras 5]GST is not payable on notice pay recoveries made from employees for not serving the full notice period.Final Conclusion: Both questions are answered in the negative: recoveries from employees for parental insurance and recoveries as notice pay for not serving the full notice period do not constitute 'supply' under the GST law and are not liable to GST. Issues Involved:1. Whether GST is payable on recoveries made from employees towards providing parental insurance.2. Whether GST is payable on notice pay recoveries made from employees for not serving the full notice period.Issue-wise Detailed Analysis:Issue 1: GST on Recoveries for Parental InsuranceApplicant's Contentions:- The parental insurance scheme is a voluntary benefit provided to reduce employees' financial burden, not a business activity.- The insurance service is provided by a third-party insurance company, and the applicant merely facilitates this service without profit.- The activity is not covered under the definition of 'supply' under Section 7(1)(a) of the CGST Act.- The parental insurance scheme is not incidental or ancillary to the applicant's main business of crop protection and seeds.- Rulings in similar cases (e.g., State of Gujarat vs. Raipur Manufacturing Co. Ltd., Panacea Biotech Limited vs. Commissioner of Trade and Taxes) support the contention that such activities are not business activities.- As per Clause (a) of Section 7(2) of the CGST Act and Entry (1) of Schedule III, the recovery made for parental insurance does not amount to supply.- Previous rulings (e.g., M/s Jotun India Private Limited, M/s POSCO India Pune Processing Centre Private Limited) have held that such recoveries do not constitute supply under GST laws.Authority's Observations and Findings:- The issue was previously decided in favor of the applicant in similar cases (e.g., M/s Jotun India Private Limited, M/s POSCO India Pune Processing Centre Private Limited).- The recovery of 100% of the parental insurance premium from employees does not amount to supply of service under Section 7 of the CGST Act.- Therefore, GST is not payable on recoveries made from employees towards providing parental insurance.Conclusion:- GST is not payable on recoveries made from employees towards providing parental insurance.Issue 2: GST on Notice Pay RecoveriesApplicant's Contentions:- Notice pay recovery is not a consideration for any supply of goods or services but a compensation for breach of the employment contract.- The recovery is a reasonable estimate of loss due to sudden termination of employment and not for any service provided by the applicant.- As per Section 73 & 74 of the Indian Contract Act, such recoveries are compensations for damages.- Previous rulings and clarifications (e.g., Education Guide by CBEC, HCL Learning Ltd., GE T&D India Ltd vs. Deputy Commr of Central Excise) support the view that notice pay recovery is not a supply under GST laws.- Schedule III of Section 7 of the CGST Act excludes services by an employee to the employer in the course of employment from the definition of supply.Authority's Observations and Findings:- Similar issues were addressed in cases like M/s Bharat Oman Refineries Limited and upheld by the Madhya Pradesh Appellate Authority for Advance Ruling (MPAAAR).- The Hon'ble Madras High Court in GE T&D India Ltd vs. Deputy Commr of Central Excise held that such recoveries do not constitute a taxable service.- The employer does not tolerate any act but permits a sudden exit upon compensation, which is not a supply of service.- The provisions of Schedule II of the CGST Act do not apply as there is no supply under Section 7(1A).- The notice pay recovery does not amount to supply and is not liable to GST.Conclusion:- GST is not payable on the notice pay recoveries made from employees on account of not serving the full notice period.Order:- Question 1: GST is not payable on recoveries made from employees towards providing parental insurance.- Question 2: GST is not payable on notice pay recoveries made from employees for not serving the full notice period.