Recovery from Employee, Now subject to GST

Recovery from Employee – Now subject to GST

In yet another ruling by AAR in case of M/s Caltech Polymers Private Limited, the scope of term “Supply” has been further widened. Even the companies running canteen as per statutory norms would also be required to pay GST on the amount recovered from the employees. The Ruling held that exemption in respect of canteen run as per Factories Act was available under Service Tax and not under GST. The authority emphasized that supply of food to the employees is covered under Schedule II of the CGST Act 2017, despite the fact that such service is provided with no profit. This means that reimbursement on actual basis will also considered as supply.

The authority held that where the supply is made for a consideration it shall be chargeable to GST. It deliberated on the definitions of term “Supply” and “Consideration” and came to the conclusion that the recovery of food charges from the employees tantamount to consideration for the services rendered by the company. Where the company does not charge any amount it would have gone out of the ambit of Section 7(1)(a).

This Advance ruling has not just expanded the meaning of “supply” for purposes of food but also for any supply of goods/services provided by the company to its employees. For instance, the company provides laptop to its employees and deducts monthly installment from salary, it shall also be charged to GST. Or the other case would be where the company bears the petrol expenses of the car used by the employee/owned by the employee and then recovers the same, it shall attract GST. To be simply put, a company recovering any amount from its employees other than advances/loans etc. will tantamount to supply chargeable to GST.

We feel rather than providing goods or services to the employees and then recovering the said amount, the company can resort to loan and advances. Where an advance is given to an employee and recovered on monthly basis, it shall not be treated as “supply” and the company would not be required to pay GST. Instead of providing laptop the company can resort to advances for purchase of laptop.

With the interpretation taken by AAR, not only the term “supply” is expanded but also the term “Aggregate turnover” would also have an impact. The reimbursements if covered under term Supply would also form part of the Aggregate turnover. For instance a consultant making tax payment on behalf of the client and then getting it reimbursed would also be liable to pay GST on said amount.  

We at MyGst.MyTax understand that it is very important for taxpayers to do rigorous deliberation and check what amongst their transactions is chargeable to GST or not. Because if these sort of judgments keep on coming, we feel that most of the transaction would form part of Supply leaving apart a few.