GST on rent of employee paid by employer

[Kaustubh Karandikar]

1) Employees of XYZ Ltd. are staying in a rented flat and rent for the same is paid by XYZ.

2) Employees is paying house rent and recovering from XYZ. Under both these situations, since employee is treated as related persons as per GST provisions, it will be treated as service provided to employees and therefore XYZ will be liable to pay GST on it under forward charge even if there is no consideration received by XYZ? Views of the experts please.

[Amit Agrawal]

Your attention is invited to Question at S. No. 5 and its answer as per Circular No. 172/04/2022-GST dated 06.07.2022 and same reads as follows:

Question: Whether various perquisites provided by the employer to its employees in terms of contractual agreement entered into between the employer and the employee are liable for GST?

Answer: 1. Schedule III to the CGST Act provides that “services by employee to the employer in the course of or in relation to his employment” will not be considered as supply of goods or services and hence GST is not applicable on services rendered by employee to employer provided they are in the course of or in relation to employment.

2. Any perquisites provided by the employer to its employees in terms of contractual agreement entered into between the employer and the employee are in lieu of the services provided by employee to the employer in relation to his employment. It follows therefrom that perquisites provided by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST when the same are provided in terms of the contract between the employer and employee.

[Amit Agrawal]

Just for information in the context of this discussion:

'Services by way of renting of residential dwelling for use as residence' is currently exempted from GST as per S. No. 12 of Notification No. 12/2017- Central Tax (Rate) (as amended till date).

In terms of one of recommendations of 47th GST Council Meeting, exemption is to be withdrawn on 'Renting of residential dwelling to business entities (registered persons)'.

Even after this change (though exact wordings of changes in exemption-notification is yet to be seen), if subject situation indeed falls under as per S. No. 5 in terms of Circular No. 172/04/2022-GST dated 06.07.2022 (i.e. perquisites provided by the employer to its employees in terms of contractual agreement entered into between the employer), then, gst will not be payable by employer under forward charge against rent reimbursement as per said circular.

These are strictly personal views of mine and the same should not be construed as professional advice / suggestion.

[Kaustubh Karandikar]

Thanks Amit ji for your kind advice.

[Amit Agrawal]

You are welcome, Shri Kaustubh Ji!

[Shilpi Jain]

Where rent is paid by employee and taken from company, it is money paid for employee services. Not liable

[Shilpi Jain]

If rent paid by company still same reply. However even if regarded as service, it is an exempt service- renting of residential dwelling for residence

[Kaustubh Karandikar]

Thanks Shilpi ji for your kind advice.

[Amit Agrawal]

W.e.f. 18.07.2022, 'where the residential dwelling is rented to a registered person', exemption from GST is withdrawn.

Furthermore, from above-said date, such registered person is also made liable to pay GST under RCM.

[Amit Agrawal]

Assuming that XYZ Ltd - as per query - is registered under GST and is a service recipient for 'Renting of residential dwelling', it will require to pay GST under RCM w.e.f. 18.07.2022.

Now, the next question to be considered is whether such Co. will be eligible to avail ITC against such gst so paid. Or is such ITC blocked u/s 17 (5) (g) (i.e. goods or services or both used for personal consumption)?

[Amit Agrawal]

In my view, XYZ Ltd. is eligible for such ITC as restrictions u/s 17 (5) (g) is for 'personal consumption by the tax-paper' and not for 'personnel consumption by employee of the tax-paper'.

However, possibility of disputes / litigation and resultant risks thereto cannot be ignored completely.

Hence & unless there is no other compelling reasons (such as differential income tax treatment in hand of employees, if any), in my view, it is always better that employee takes premises on rent in his name.

And employer Co. reimbursements such rent to the employee, merely as part of perquisites in terms of contractual agreement entered into between the employer and the employee are in lieu of the services provided by employee to the employer in relation to his employment.

This will ensure that Co. is not liable to pay GST under RCM and thereby, entire dispute relating to ITC can be avoided.

These are strictly personal views of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

*Please read - in above post - as follows: 'Hence & unless there is any other compelling reasons ...'

[Amit Agrawal]

Furthermore, in above suggested action of mine, potential disputes / risk of denial of ITC by the Dept. on the ground that employer has provided exempted service to the employee (by way of Services by way of renting of residential dwelling for use as residence to an unregistered person) also gets eliminated in my personal view.

[Prakash and Thiagarajan]

Sir, I was going through certain decisions of the service tax regime. The following decision of the Hon'ble Bombay High Court has held as to why expenses related to residential colony is not in furtherance of Assessee's business and hence CENVAT credit was disallowed. This might be of help to decide a way forward.

2010 (10) TMI 10 - BOMBAY HIGH COURT

[Amit Agrawal]

Dear Shri Suresh S Ji,

Referred judgement of Bombay HC deals with welfare activity by an assessee engaged in the business to manufacture cement. But, definition of 'business' u/s 2 (17) of the CGST Act, 2017 is very-wide and subject expenses - under discussion here - are not labour / employee welfare activity. So, subject expenses should pass bar of Section 16 (1).

However, controversy and risks to ITC comes from restrictions u/s 17 (5) (g). For more details, reason for two contrary views fully justifying themselves and risks in availing ITC etc., you may refer to ongoing discussion under Issue ID No. 118102 bearing subject-line as ITC of RCM paid on residential property w.e.f 18.7.22.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Kaustubh Karandikar]

Thanks Amit Sir for your advice.

[hitesh mundra]

In Case of Employee & Employer Relationship If Employer Recover Rent amount from employee is covered under sch-III it is neither supply of Goods nor supply of service it can be treated as exempt supply under section 2(47) exempt supply inter-alia included non taxable supply, Is ITC need to be reversed if Is ITC needs to reversed under rule 42/43 of CGST rule?

AI Summary

GST on employer-paid rent may attract reverse charge for registered recipients, raising contested ITC and perquisite issues. Contractual perquisites provided by an employer to an employee are treated as not constituting a taxable supply under Schedule III when they are in lieu of services under the employment contract. Renting of residential dwellings was exempt but the exemption for dwellings rented to registered persons was withdrawn from 18 July 2022, attracting reverse charge liability on the registered recipient. This creates potential disputes over entitlement to input tax credit because of personal-consumption restrictions; arranging tenancy in the employee's name with employer reimbursement is suggested to avoid RCM and ITC risk.