According to an important decision of the Gujarat Authority of Advance Ruling ordered to recover 18% GST on recovery from an employee leaving the job without completing the notice period. It was considered as “Tolleting the Act” by the employee for not completing the notice period. It has been ordered that it will be covered under section 5 (e) for Schedule II of the CGST Act.
It needs to be noted that the notice salary received from the company due to the failure of the employee to fulfill the terms / conditions of the employment contract is only compensation. Such recovery from employee including GST is not a positive step.
There is no such contract between the company and the employee, under which it is seen as a loss or damage if the notice period is not completed. Payment of damages is a condition of the contract. No GST should be recovered from the employee on notice recovery by the company.
In GST, supply is subject to tax, transactions are taxed under the order. The supply falls under Section 7 of the Central Supply and Service Tax Act, 2017 (CGST Act).
In our discussion, Section 7 (1) (a) of the CGST Act is relevant, which is as follows:
7. (1) The purpose of this Act is to include “supply”.
(a) All types of supply of goods or services or both, such as sale, transfer, barter, license, hire, lease or disposal, or agreeing to be considered by a person during or beyond business.
Further, para 5 (e) of Schedule II of the CGST Act (means, activities or transactions treated as supply of goods or services) are the following as a supply of service:
- “(E) to refrain from an act, or to bear an act or condition, or to agree to an obligation to perform an act;”
- In addition, sub-clause (d) of the Central Goods and Services Tax (Amendment) Act, 2018 of section 7 (1) of the CGST Act was omitted and sub-section (1A) was incorporated with retrospective effect. Was
- On 1 July 2017, it was stated that the procedure for constituting the supply of transactions would fall under Section 7 (1) ibid. Further, the scope of Schedule II of the CGST Act is now limited to the supply of categories in the form of supply of goods or services.
Therefore, employees who do not complete the notice period will come under 5 (e) of Schedule II of the CGST Act. But GST collection should not be applied as it should not be seen as loss or damage if the notice period is not completed. It is only a penalty imposed for breach of the terms of the employment contract. It cannot be termed as a “supply” under Section 7 (1) of the CGST Act.
(Bimal Jain – author is Executive Director at A2Z Tax Corp LLP, his personal views.)