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

Pursuant to the said acquisition, certain employees of Company B’s subsidiary (B1) were transferred to Company A’s subsidiary (A1) along with the associated gratuity liabilities. The transfer of employees and the corresponding liabilities took place without any agreement or contractual arrangement between A1 and B1. Subsequently, B1 transferred funds to A1 for the purpose of discharging the gratuity obligations pertaining to those employees.

The query is:
Whether the transfer of funds from B1 to A1, made solely for the purpose of settlement of gratuity dues of employees originally employed under B1 and now transferred to A1, would qualify as a “supply” under Section 7 of the CGST Act, 2017, thereby attracting GST liability; or whether such transfer shall be treated as a mere movement of funds for settlement of employee-related obligations, not amounting to consideration for any supply of goods or services under GST law?

AI Summary

Whether inter-group gratuity payment is 'consideration' for supply under Section 7 of the CGST Act or a non-taxable fund transfer Two parent companies merged, causing subsidiary employees of one group to transfer to the other group's subsidiary; the originating subsidiary then sent funds to the receiving subsidiary to discharge gratuity liabilities. The legal question is whether that inter-group payment is 'consideration' for a supply under Section 7 of the CGST Act and thus taxable, or merely a fund transfer to settle employee obligations outside GST. The forum reply sought factual clarity on whether the paying subsidiary was only required to settle the liability and whether the recipient merely accepted funds to discharge gratuity, indicating more facts are needed to determine GST treatment.