- Introduction
Services by an employee to the employer in the course or relation to his employment is not treated as supply as per para 1 of Schedule III of the CGST Act, 2017. Accordingly salary paid by the employer to its employee where there is master servant relationship will be outside the ambit of GST. Further as such salary received by employee is outside scope of supply, it shall not be added to its aggregate turnover (Section 2(6) of the CGST Act,2017) for determining requirement of registration of the employee under Section 22 of the CGST Act,2017.
However the story doesn’t here as it is worth mentioning here that as per Explanation(a)(iii) to Section 15 of the CGST Act, 2017, employer and employee are deemed to be related persons. Does this have any GST implications?
The answer to this is that it may have implications. This is due to application of Section 7(1)(c) of the CGST Act, 2017 read with para 2 of Schedule I of the said Act which mandates that supply of goods or services or both inter-alia between related persons, when made in the course or furtherance of business shall be treated as supply even if made without consideration. Further said para also states that gifts not exceeding Rs 50,000 in value in a financial year by an employer to employee shall not be treated as supply of goods or services or both.
In the above backdrop the GST as well as input tax credit (ITC) implications on gifts and perquisites to employee are discussed in succeeding para’s.
2. GST on gifts to employees
In this regard, press release dated 10.07.2017 is relevant which states that in light of Schedule I of the CGST Act, 2017, gifts upto a value of Rs 50,000/- per year by an employer to his employee are outside the ambit of GST. However, gifts of value more than Rs 50,000/- made without consideration are subject to GST, when made in the course or furtherance of business.
2.1 Meaning of gifts
Gift has not been defined in the GST law. In common parlance, gift is made without consideration, is voluntary in nature and is made occasionally. It cannot be demanded as a matter of right by the employee and the employee cannot move a court of law for obtaining a gift. (Press release dated 10.07.2017).
2.2 Availing of ITC if gifts to employees are taxable
It has been clarified vide Circular No. 92/11/2019-GST dated 07.03.2019, that where the activity of distribution of gifts falls within the scope of supply on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible to avail of the Input Tax Credit (ITC). Thus provisions of Sec 17(5) (h) of the CGST Act, 2017 regarding blocking of ITC will not apply in this case. However in cases where the gifts to employees are not taxable, ITC thereon should not be availed by the Corporation.
Illustration 1:
X Ltd had a bumper profits during a financial year and thus in order to reward employees it distributed an electronic item worth Rs 75,000/- to each of its 100 employees. Now from facts of the case we can see that in this case that electronic item has been distributed on voluntary basis by X Ltd as same was not a right of the employees. Further as the value exceeds Rs 50,000/- per employee per annum, the entire amount of Rs 75,000/- per gift will be treated as supply and thus subject to GST. However X Ltd can avail the input tax credit in respect of GST paid on purchase of such items.
Illustration 2:
X Ltd has an approved HR policy wherein after completion of every three years of service in the Company, such an employee will get an electronic item worth Rs 75,000/-. Now in this case the employee gains a right to receive such electronic item on completing three years of service and thus thus distribution cannot be regarded as a gift and thus will not be subject to GST. However input tax credit in respect of GST paid on purchase of such items should not be taken by X Ltd.
3. GST on perquisites to employees
The Services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods or supply of services). It follows therefrom that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST.
It has been clarified vide press release dated 10.07.2017 that facilities / perquisites provided to employees in terms of contract between employer and employee and which are part and parcel of the cost-to-company (C2C) will not be subject to GST. Treatment of some of the facilities are being discussed below alongwith the linking of input tax credit.
3.1 Facility of club, health and fitness centre
If such services are provided free of charge to all the employees by the employer then the same will not be subjected to GST, provided appropriate GST was paid when procured by the employer. Needless to mention here that a per Section 17(5)b)(ii) of the CGST Act, 2017 , ITC of membership of club, health and fitness centre cannot be availed.
3.2 Free housing
Free housing to the employees, when the same is provided in terms of the contract between the employer and employee and is part and parcel of the cost-to-company (C2C) will not be subject to GST. In this regard the employer may be providing housing to the employees in its own premises.
In such cases a question may arise as to whether the input tax credit can be availed on the GST paid on repair and maintenance of the residential complex of employees. In this regard Gujarat AAR has in case of Kandla Port Trust – Advance Ruling No. GUJ /GAAR/R/13/2019 vide its order dated 22.08.2019 has adjudged that repair and maintenance of residential colony do not relate to furtherance of business / output supply and therefore Input Tax Credit thereon cannot be availed in light of Section 16(1) and 17(1) of the CGST Act,2017.
In case where the employee are residing in residential accommodation taken on lease by the employer, GST will not be applicable in light of Sl. No 12 of exemption Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. In this regard West Bengal AAR has in case of Borbheta Estate Pvt Ltd (Appeal Order No. 13/WBAAR/ 2019-20 has vide its order dated 27.06.2019 has held that in cases the employer has taken dwelling units on lease meant for residential accommodation of its employees, the same will be exempt as per SL. No 12 of the exemption notification. Thus it being exempt, question of any input tax credit thereon does not arise.
4. Concluding remarks
Applicability of GST on gifts and perquisites to employees hinges upon the terms of the employment contract. Accordingly it should be ensured by the employer that what all benefits they intend to provide to their employees are covered under the employment contract in a clear manner to obviate any future disputes in this regard.
***
A BIG THANKS to you for visiting our site and reading this article. Kindly provide your feedback on the above article in comment section below. Also please intimate about other GST issues on which you would require our team to pen down articles. Further doubts on GST may be lodged on ‘Ask GST query tab‘ under ‘Your GST queries’ tab on home page.Our GST experts will provide their reply on the matter raised at the earliest and same can be seen under ‘GST query resolved’ tab under ‘Your GST queries’ tab.
You can also subscribe to our free newsletter to always be updated on GST Law by filling the subscription form at home page.
Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
