Payment of Servcie Tax on Notice pay recovery by employer.

[Ashwin Garg]

Sir,

As per letter of appointment, employees has to serve three (3) month notice period incase of resignation but if they do not serve entire three (3) months period, then the employer company deduct as 'notice pay recovery' equal to three (3) months basic salary or basic salary for balance period from full and final settlement of employee.

querry :

1) Whether employer company need to pay service tax on notice pay recovery ?

2) Whether the notice pay amount so recovered will be treated as including Service Tax or Excluding Service Tax ?

3) Whether the employer company need to raise an Invoice to resigned employee ?

4) Under which head the employer company should deposit Service Tax?

5) Under which category the service should be incorporated in Service Tax Registration Certificate ?

Thanks in advance.

Ashwin Garg

[PAWAN KUMAR]

dear sir,

as per my view, no service tax is liable on such recovery, as no service involve.

[DR.MARIAPPAN GOVINDARAJAN]

As told by Mr. Pawan Kumar question of service and service tax do not arise.

[Akash Deep]

Dear Sir,

at the most your transaction may be coveredunder section 66E(e) i.e. agreeing to the obligation to refrain from an act or to tolerate an act or situation or to do an act. However, to fall under this, act has to be an stand alone act. it must not be an act which is an aftermath of another contract between parties. Exercise of rights by a party arising out of contract in the event of default by other party can not be treated as an independent Act.

Further, deducting money as penalty can never be equivalent to consideration received in the event of provision of a service.

transactions is not a service.

Akash deep

[YAGAY andSUN]

Dear Ashwin,

No service tax would be applicable on the transactions where employee relationship do exist.

Regards,

NeelamTaneja(Executive Consultants)

YAGAY and SUN

(Management, Business and Indirect Tax Consultants)

[Ashok Patil]

No employer - employee relationship exists on termination of employment contract and tolerating an act of breach of contract will fall under declared services u/s 66E(e), as such service tax will be applicable.

[PAWAN KUMAR]

Dear Sir,

As per my view :

1. In the instant case no activity involved, as no service as per clause 44 of 65B. therefore no liability of service tax.

2.This is only an transaction relatable to money or actionable claim.

3. The same is covered under the provision of service by an employee to the employer in the course of or in relation to his employment.

4.It will never cover under section 66(E)(e).

No service tax is leviable on such notice pay amount.

[Ashok Patil]

Please refer the definition of Service which has two parts –

• Any activity carried out by a person for another for consideration and
• Includes a declared service

It implies that the declared services may or may not involve any activity as such still those services will fall under the tax net.

Also, as I already mentioned above, on termination of employment of service by whatever reason, no employer – employee relations exists as such any compensation as an obligation to tolerate an act or a situation will be covered under the declared services.

[YAGAY andSUN]

Dear All,

Please go through this draft circular and thanks to God that it is still a draft circular and has not become the law

F. No.354/127/2012-TRU.

Hence, no service tax.

NeelamTaneja, (Executive Consultant)

YAGAY and SUN

Management, Business and Indirect Tax Consultants)

[Mahir S]

Hi All,

It is a fact that one of the ingredients for the service tax payment is that an activity should have been provided for a consideration. Where the employees pays for such services or where the amount is deducted from the salary or a portion of the salary foregone by the employee – Such activity will also be considered as having been made for a consideration and thus liable for tax.

As per the new service tax law post negative era, services provided by an Employee to Employer is exempt, however service provided by Employer to Employee is taxable and service tax liable to be paid.

In the current situation, it is deemed to be a service provided by Employer to Employee, hence the same is taxable. It is an income in the hands of the employer and therefore employer has to pay service tax thereon.

[Ashok Patil]

Perfect.........

Agree with Naveed

[MUKUND THAKKAR]

well explain by naveedji.. 100%

[Mahir S]

Thanks to all for the love and support.

[KASTURI SETHI]

Sh.Ashwin Garg Ji,

Someone has asked me to comment on this issue. So my views are as under:-

I am of the view that ST is not applicable in such a situation. I concur with the experts, namely, Sh.Pawan Kumar, Sh.Akash Deep, M/s.Yagay and Sun and Sh.Govindarajan.The very much basis of recovery of three months' pay from employee by employer Co. is the upshot of 'appointment letter' issued by the Co. So relationship has not vanished. It is appointment letter and not contract.There is a gulf of difference between 'Appointment Letter' and 'Contract'. Service does not exist.Since contract not does not exist, Section 66 E (e) is not applicable to this situation.

[KASTURI SETHI]

Correction. Pl. read the word, "an offshoot' instead of 'upshot'. Offshoot is proper word here.

AI Summary

Service tax applicability on notice pay recovery: debate whether deduction constitutes a taxable service or non-taxable money recovery. Whether an employer's deduction of notice pay from a departing employee is a taxable service or a non-taxable money recovery is contested. Many commentators conclude no service tax applies because the deduction is a contractual salary adjustment/actionable claim lacking a separate service and occurs within the employment relationship. Others contend it could fall within declared services as an agreement to tolerate or refrain from an act, or as an employer-to-employee service, and thus may be taxable; practical questions on invoicing, deposit heads and registration classification remain unresolved and were variously answered.