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

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.