GST Query – Inter-company Employee Transfer & Gratuity Recognition

[Narayan Pujar]

In a group structure, Company A and Company B permit inter-company transfer of employees as per a common HR policy. Upon such transfer, Company B recognises the past service rendered by the employee in Company A for the purpose of gratuity eligibility  and correspondingly the accumulated gratuity liability is transferred from A to B.

I see issue that arises in cases where:

• The employee has completed less than 5 years of service at the time of transfer from Company A (say 4 years), and

• Due to recognition of past service by Company B, the employee becomes gratuity-eligible within one additional year of service with Company B, whereas had the employee moved outside the group, such benefit would not have accrued.

Query for discussion:
Can the accelerated gratuity eligibility, arising solely due to group HR policy, be construed as a “service” provided by Company B to the employee, or as a taxable benefit under GST?

[Ganeshan Kalyani]

Sir, there is not GST implication on gratuity as such. There is no GST on employee-employer relationship.

[Shilpi Jain]

At the most this could be considered as a sharing of cost. Though documentation like employee offer letter, accounting in books, etc. will play a vital role to ensure that in case any dispute is raised by department for this, there is enough material to substantiate and support the facts.

[KASTURI SETHI]

(i) Gratuity cannot be consideration. It is reward, boon or gift /retiral benefit for the good and efficient services performed by an employee and it depends upon sweet will of the Employer. The basis is various judgments of Hon'ble Supreme Court. I agree with Sh. Ganeshan Kalyani, Sir.

(ii) There are contradictory case laws regarding cost sharing on account of such inter-company transfer/transaction.

(iii) It is covered under Clause No. (1) of Schedule-IIISection 7 of CGST Act. 

AI Summary

Inter-company employee transfers: accelerated gratuity typically treated as retiral benefit, not a GST-taxable service. Whether accelerated gratuity eligibility from an intra-group HR policy is a service or taxable benefit under GST: gratuity is treated as a retiral benefit not consideration for supply and the employer-employee relationship generally does not attract GST; alternatively the transfer may represent cost sharing between group companies, with accounting and documentation decisive and Schedule III exclusions potentially applicable.