Place of Supply - Other employee Recovery

[KSA Associates]

Dear experts, Kindly opine your view on below case

ABC LTD having Maharashtra GST registration no. recovers amount from employees with regards to Notice pay. Some employees are outside Maharashtra as per the ABC LTD payroll record.

What will be the place of supply in case of employees who are outside India.

In nutshell, whether IGST will charge or CGST/SGST will charge?

[Jinal S]

CGST Circular No. 178/10/2022-GST clarifies that no gst is applicable on notice pay recovery.

[KSA Associates]

Dear Experts, In case of same question above, instead of Notice pay recovery if it is other recovery for eg ID Card recovery , Laptop damage recovery etc. what will be the answer??

[Sadanand Bulbule]

Think of the possibility of Entry No. 5(e) of II Schedule to the Act. Tolerating an act or supply of service. Also refer Karnataka AAR rendered in the case of Celcom Solutions. KAR No. ADRG 45/2020.

[KASTURI SETHI]

It will be compensation and compensation can not be treated as income/consideration. Not taxable.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, 

In my view THIS ACTIVITY should fall in the category of "NOT Tolerating an Act". Hence it is out of the scope of Entry No.5 (e) of Schedule-II. Hence not taxable. No question of CGST/SGST or IGST arises.

                                                          

[Sadanand Bulbule]

Yes Sir. I had posted it in the event of "over interpreattion" by the authorities.

[Shilpi Jain]

Every receipt of money need not be charged to GST. Compensation, penalties generally are not liable to GST as there is no supply being made but these are deterrrents to ensure that the contracts are not breached.

[Yash Shah]

As per the section 7(2) of CGST Act, 2017 i.e schedule 3 in which the list specified is neither to be treated as supply of goods nor supply of services, in which it is stated that service provided by an employee to the employer in the course of or in relation to hiss employment not to be treated as supply of good or supply of services.

In para 5(e) of schedule 2 of Central Goods and Services Act, 2017 that  “Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act” has been specifically declared to be a supply of service, if the same thing is constitute as “supply” within the Act.

For the supply, there must be one of the most essential elements to be there in the transaction, except the list specified in schedule 1, i.e, Consideration.

Circular No. 178/10/2022-GST specifically mentioned that the amounts recovered by the employer were not as consideration for tolerating the act of such premature quitting of employment but as penalties, and, therefore, the employer was not liable to pay GST on notice pay.

Also, you can refer MANAPPURAM FINANCE LTD. Versus ASSISTANT COMMISSIONER OF CENTRAL TAX AND EXCISE, THRISSUR - 2022 (12) TMI 411 - KERALA HIGH COURT, Kerala High Court order.

By referring to the circular and case law mentioned above, we can say that whatever amount that has been recovered from the employee as Notice pay is to discourage non-serious employees from taking up employment. As they are not leaving the entity without the specific notice period that has been mentioned in the employment agreement, then for such breach of the contract the amount will be deducted for such period they have not given the notice as per the policy term, and remaining amount will be refund back to the employee.

As in such case whatever amount is collected is not for the tolerating the act as after collecting the amount employee get nothing in the back so it will not considered as consideration and the transaction will not constitute in supply so there will be no levy of GST.

AI Summary

Employee recoveries for notice pay and equipment damages not subject to GST per CGST Circular 178 A company with Maharashtra GST registration recovers amounts from employees for notice pay and other items like ID cards and laptop damages. The discussion centers on GST applicability and place of supply rules for employees located outside Maharashtra and India. Multiple experts conclude that notice pay recovery is not subject to GST based on CGST Circular No. 178/10/2022-GST, which clarifies such amounts are penalties rather than consideration for services. For other recoveries like equipment damages, experts argue these constitute compensation rather than taxable supply since no service is provided in return. The consensus is that employee recoveries generally fall outside GST scope as they lack the essential element of consideration for supply, making the place of supply question irrelevant.