Amount of Gratuity is Chargeable under GST or Not after Merger of companies.

[Khushi Kansal]

There are two companies, Company A and Company B. Company A and Company B are the parent entities of their respective subsidiaries, namely A1 and B1. Subsequently, Company A acquires Company B, and as a result, B1 also becomes a subsidiary of Company A.

Prior to the acquisition, certain gratuity obligations relating to employees of Company B were pending. After the acquisition, Company A received funds from Company B (or its subsidiary B1) and discharged the gratuity liability of the said employees.

The query is:
Whether the transfer of funds from Company B (or B1) to Company A, for the purpose of settlement of gratuity dues of employees of Company B, would qualify as a “supply” under Section 7 of the CGST Act, 2017 and thereby attract GST liability, or whether such transfer will be treated as a mere movement/settlement of funds not amounting to consideration for supply of goods or services?

[Sadanand Bulbule]

The transfer of funds from Company B (or B1) to Company A for settlement of gratuity dues of Company B’s employees does not constitute a “supply” under Section 7 of the CGST Act, 2017.

Section 7 requires a supply of goods or services for a consideration in the course or furtherance of business.

In this case, Company A does not provide any goods or services in return, receives no consideration, and the transaction is purely for discharging statutory employee liabilities. Therefore, it is merely a movement of funds to settle gratuity obligations and does not attract GST.

[KALLESHAMURTHY MURTHY K.N.]

Sir, 

The transfer of funds from Company B (or B1) to Company A for settling gratuity dues is merely a transfer of funds which does not constitute a "supply" under Section 7 of the CGST Act, 2017, since it is a contingent transaction, and not a consideration and not a supply of service as per Schedule III of the CGST Act. Hence, no GST is applicable. 

[KASTURI SETHI]

Such transaction/activity is out of definition of "Service" as defined under Section 2(102) of CGST Act. Hence out of gamut of GST. 

AI Summary

Transfer of funds to settle pre acquisition gratuity is a mere settlement of liabilities, not a taxable supply under GST. Transfers of funds from Company B (or its subsidiary) to Company A to enable settlement of Company B's pre acquisition gratuity dues do not constitute a taxable supply because Company A provides no goods or services and receives no consideration; the transfers are a mere movement/settlement of funds to discharge statutory employee liabilities and therefore fall outside the scope of GST, consistent with exclusions for services and Schedule III treatment.