Employee recoveries have always been a contentious issue, whether in pre-GST era or in GST era. This issue has been addressed by Maharashtra Authority of Advance Ruling (‘AAR’) in case of Tata Motors Ltd.[1] recently. The advance ruling was sought on the issue, as to whether, provision of bus facilities by the employer to the employee on a nominal price will be liable to GST. The AAR observed that since the facility is provided only in the capacity of employee, the transaction between the applicant [Tata Motors Ltd.] and the employees is due to ‘Employer-Employee’ relation and is not a supply under GST by virtue of clause 1 of Schedule III to the Central Goods and Services Tax Act, 2017 (‘CGST Act’).
The above ruling is a welcome one for the assessees, as it will certainly help, at least, in reduced compliance work.
We will be discussing effect of this AAR ruling in the context of other employee recoveries.
Recovery as deduction from salary
Let us address the taxability of the most common ways of recovering the amount from employees i.e. deduction from the salary of employees. The same was dealt in the case of Tata Motors Ltd.
The taxable event i.e. Supply (Section 7 of the CGST Act) and the term ‘business’, both have been defined in an inclusive manner under GST which connotes their wide coverage. All forms of supply which are provided for consideration in the course or furtherance of business have been covered within the ambit of supply.
On reading of above provisions, it can be said that the services provided by the employers to the employees are covered under the ambit of supply and the same is leviable to GST.
However, it is worthwhile to see if the above services can be said to be covered under Schedule III of the CGST Act, as held by the AAR. It is pertinent to highlight that the said schedule covers services provided by ‘employee to employer’ and not by ‘employer to employee’.
A doubt which arises here is whether the service provided by the employer can be considered to be in the capacity of a service provider? Further, will it make any difference if the services are provided only to select employees , on payment of consideration? It seems that this relationship of employer and employee, i.e. as service provider and service recipient has not been considered by the AAR.
Further, since the services are not provided to all the employees, can the services be said to be provided in the course of employment? If yes, can it be supported by the Press Release dated 10-07-2017?
Let us address the above issues by delving into the tax treatment by other rulings of AARs, in service-tax regime and jurisprudence developed in some other mature VAT jurisdictions.
Clearly contrary to the above ruling of the AAR, Kerala AAR in the matter of Caltech Polymers Pvt. Ltd.[2] (upheld by Appellate AAR[3]), has held that the recovery of amount from employees for the canteen services provided by the company is taxable under GST. However, the same was not considered in the decision of Tata Motors.
The issue has also been dealt in the erstwhile service tax regime. A draft circular (which was never finalized) clarified that whether the amount is deducted from salary or the services are provided against a portion of the salary foregone by the employee, both will fall within the definition of ‘service’. The status of the employee will be of service recipient and not as a mere employee when consuming such output service. The above draft circular was relied upon by the CESTAT in case of Ultra Tech as well as SPM Autocomp. Since the above circular was never finalized, the sanctity of the same is an open issue.
The above view has been endorsed internationally as well, particularly in the case of Astra Zeneca UK Ltd.[4] In the said case, a scheme was introduced under which employees could opt to take a portion of their remuneration in the form of goods and/or services rather than as part of cash salary. It was held by the Court that provision of vouchers amounts to supply of services effected for consideration. Following the said case, HMRC Revenue and Customs issued Brief No. 28/11 which clarified that the amount of salary foregone is consideration for supplies of the benefits, whether provided under a salary sacrifice or by a deduction from salary.
From the above, it can be said the services provided by the employers can be said to be an independent service in the capacity of ‘service provider’. However, the view taken in Tata Motors AAR ruling is to the contrary. But, since the Tata Motors ruling is favourable to industry, it will be interesting to see how far one can count on and rely on the said ruling.
Apart from deduction from salary of employees, let us see if this AAR ruling can be applied in other cases also.
No recovery/ provision of services as part of employment contract (cost to company)
Will the situation change if the facilities are provided to all the employees as part of the employment contract as perquisites i.e. CTC and thus, no recovery is made from employees?
This seems to be the most convenient way of dealing with such activities since Press Release dated 10-07-2017 has clarified that the services provided free of charge, in terms of the contract between the employer and employee, to all the employees, will not be chargeable to GST.
Though the press release is in favour of companies, the ambiguity which remains is whether these services can be said to be in nature of salary foregone, in the form of perquisites, and will be leviable to tax? In such cases, can one try to protect them contractually?
Recovery from employees on behalf of vendors
A company may recover an amount from the employees on behalf of the vendors and pass on the same to vendors. Well, the case seems to be similar to deduction from salary, but it may not be!
In such cases, a doubt which always keeps lingering is that whether the services are actually provided to employees directly, or the service recipient is employer, who is merely recovering the amount from the employees?
Precisely, in the case of insurance recoveries, AAR[5] has held that such recoveries are not taxable. But the fate of other services for which recoveries are made from employees on behalf of vendors has not been addressed. It will be interesting to see how authorities and courts reconcile this principle with other recoveries made from employees on behalf of vendors.
Direct payment by employees to contractor/vendor
There may be situations where the contract has been entered by the company for facilitating services to employees and consideration is being paid by employees. In such cases, there is always an uncertainty about the recipient of services. Can the services be said to be received by employer since he is contractually obliged by the vendor or the services will be said to be received by the employees, since he is paying consideration?
The tax treatment and the compliances vary in both situations. The issue was addressed by the Karnataka AAR in the case of Elior India Catering LLP[6] wherein it was held that since the employee is paying consideration, he becomes the recipient of the service and the service is rendered by the vendor to the employee.
Can a person be said to be a recipient merely by payment of consideration, is a point to ponder, especially because the consideration can be paid by third party as well?
The issue of employee recoveries is an unclear area. The subject AAR ruling has given relief to Tata Motors Ltd, for whom it is binding. Unless the issues are properly addressed by the authorities by way of proper clarification, there will be no uniformity. Considering that there are conflicting decisions and orders on this subject, one should not simply rely on the AAR ruling in Tata Motors while determining the taxability on employee recoveries.
[The author is an Associate in GST practice at Lakshmikumaran & Sridharan Attorneys, Gurugram]
[1] 2020-VIL-257-AAR
[2] 2018 (4) TMI 582
[3] 2018 (10) TMI 1313
[4] Case C-40/09
[5] 2019-VIL-25-AAR
[6] 2019 (10) TMI 562
