2022 (12) TMI 359 - AAR - GST

Employee expense reimbursements not subject to GST or Reverse Charge Mechanism under Schedule III CGST Act

In Re: M/s. Yaadvi Scientific Solutions Private Limited,

AAR Karnataka ruled that reimbursement of actual expenses incurred by employee staff on behalf of the company is not subject to GST or Reverse Charge ... Levy of GST - reimbursement of expenses at actual cost which are incurred by the employee staffs on behalf of Company - applicability of Reverse Charge Mechanism on reimbursement of expenses paid on behalf of the Company at actuals which are incurred by the employee staff who is also a whole-time director Company - time limitation to take input tax credit - HELD THAT:- Services by an employee to the employer in the course of or in relation to his employment are covered under Clause 1 of the Schedule III which relates to the activities or transactions which shall be treated neither as a Supply of Goods nor as a Supply of Services. Hence the services provided by the employees of the Applicant to the Applicant are not a supply. Further, the expenses incurred by the employees are expenses of the applicant and the consideration is payable by the applicant himself and later on reimbursed by the applicant. The amount paid by the employee to the supplier of service represents the amount paid ‘by any other person’ and is therefore covered under the term “consideration” paid by the applicant to the service provider for the services received by the employees on behalf of the company. This amount reimbursed by the applicant to the employee later on would not amount to consideration for the supplies received as the services of the employee to his employer in the course of his employment is not a supply of goods or supply of services in terms of clause 1 of the Schedule III of the CGST Act, 2017 and hence the same is not liable to tax. A director who has taken an employment in the company may be functioning in dual capacities, namely, one as a director of the company and the other on the basis of the contractual relationship of master and servant with the company (employment). As per the circular only part of employee Director’s remuneration which is declared separately other than “salaries” in the Company’s accounts and subjected to TDS under Section 194J of the IT Act shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and hence taxable under reverse charge basis. Hence Reverse Charge Mechanism is not applicable on reimbursement of expenses on actuals, to a whole-time director of Company who is also an employee of the company. Whether section 16 (4) of the GST Act, 2017 applies to invoice issued under reverse charge mechanism and also wants to know when can the ITC on payment of tax under RCM be availed? - HELD THAT:- Section 15 (2) of the CGST Act 2017 says about what all shall be included in the value of supply. Based on the same, it is concluded that reverse charge is to be calculated on the gross consideration paid or payable to the supplier, i.e, the values excluding GST. Issues Involved:1. Tax liability on reimbursement of expenses incurred by employees.2. Applicability of Reverse Charge Mechanism (RCM) on reimbursement of expenses incurred by a whole-time director.3. Applicability of Section 16(4) of the GST Act, 2017 to invoices issued under RCM.4. Calculation of reverse charge on values including or excluding GST.Issue-wise Detailed Analysis:1. Tax liability on reimbursement of expenses incurred by employees:The applicant sought clarification on whether reimbursement of expenses incurred by employees on behalf of the company is liable to tax. The ruling clarified that services by an employee to the employer in the course of or in relation to his employment are covered under Clause 1 of Schedule III of the CGST Act, 2017, which states that such activities are neither a supply of goods nor services. Therefore, the reimbursement of expenses incurred by employees on behalf of the company is not liable to tax since it falls under this clause.2. Applicability of Reverse Charge Mechanism (RCM) on reimbursement of expenses incurred by a whole-time director:The applicant questioned whether RCM applies to the reimbursement of expenses incurred by a whole-time director who is also an employee. The ruling referenced Circular No. 140/10/2020 dated 10.06.2020, which clarifies that the part of a director's remuneration declared as 'salaries' and subjected to TDS under Section 192 of the IT Act is not taxable under GST. Conversely, remuneration declared as fees for professional or technical services and subjected to TDS under Section 194J of the IT Act is taxable under RCM. Since the reimbursement of expenses does not form part of salaries or perquisites and is not subject to TDS under Section 194J, RCM is not applicable on such reimbursements to a whole-time director who is also an employee.3. Applicability of Section 16(4) of the GST Act, 2017 to invoices issued under RCM:The applicant sought clarification on whether the time limit prescribed under Section 16(4) for taking input tax credit (ITC) applies to invoices issued under RCM. The ruling refrained from providing an answer, stating that this question is not covered under Section 97(2) of the CGST Act, 2017, which specifies the questions on which advance ruling can be sought.4. Calculation of reverse charge on values including or excluding GST:The applicant asked whether reverse charge should be calculated on values including or excluding GST. The ruling referred to Section 15 of the CGST Act, 2017, which outlines the value of taxable supply. It concluded that reverse charge should be calculated on the gross consideration paid or payable to the supplier, excluding GST.Ruling Summary:i. Reimbursement of expenses at actual cost incurred by employees on behalf of the company is not liable to tax under Clause 1 of Schedule III of the CGST Act, 2017.ii. RCM is not applicable on reimbursement of expenses incurred by a whole-time director who is also an employee.iii. Questions regarding the applicability of Section 16(4) of the GST Act, 2017, to invoices issued under RCM and the timing of ITC on RCM payments are not covered under Section 97(2) of the CGST Act, 2017, and hence no ruling is provided.iv. Reverse charge should be calculated on values excluding GST.