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?

[Shilpi Jain]

Is it that entity B1 was only required to pay off the gratuity liabiltiy but merely because the employees were transferred A1 has taken that money from B1?

Some more clarity on the factual aspects is required.

AI Summary

Gratuity fund transfers between subsidiaries after an acquisition may or may not be taxable under GST, facts determine characterisation. Whether an intra-group transfer of funds to discharge employee gratuity liabilities constitutes a supply under GST law is queried after Company A acquired Company B and employees and gratuity liabilities moved to A's subsidiary without any contractual arrangement, with B1 subsequently remitting funds to A1 solely to settle those gratuity obligations; the respondent sought factual clarification rather than a definitive tax characterisation.