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

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 Mechanism. Employee services to employers fall under Schedule III of CGST Act 2017, treating them as neither supply of goods nor services. For whole-time directors functioning as employees, only separately declared remuneration subject to TDS under Section 194J of IT Act is taxable under reverse charge. Reimbursed expenses represent company's own expenses paid through employees, not consideration for taxable supply. Reverse charge calculation applies to gross consideration excluding GST.

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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.

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