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How are employee-employer transactions taxed under GST?

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To understand employee-employer transactions under GST better, we need to first appreciate that every transaction has two sides and supply happens on both ends. In the present case, the employee is rendering 'employment services' and the employer is in return giving 'money' plus 'non-monetary benefits', i.e. perquisites. Unless exempt, each of these supplies will be subject to GST. Thankfully, the law has exempt some of these supplies. Let us look at them in more detail.

Services provided by the employee to the employer

Section 7(2) of the CGST Act* states that supplies covered by Schedule III shall be treated neither as supply of goods, nor as supply of services. Thus, such supplies are outside the GST net. The first entry to that schedule reads as follows:

"Services by an employee to the employer in the course of or in relation to his employment"

Thus, services provided by an employee in the ordinary course of his/her employment shall be outside GST. It should be noted that services that are not in the course of or in relation to employment shall, however, be covered. For example, it needs to be investigated whether the referral bonus earned by an employee is in the course of employment. If it is not part of his/her employment duties then such services will be subject to GST. It’s another matter whether the quantum of these services would be less than the threshold of Rs.20 lakhs.

*References to the CGST Act should be read as references to the corresponding section in the SGST / IGST Act

Services provided by the employer to the employee

Supplies made by the employer to the employee will be hit by GST. As stated above, the consideration for employment services is settled by the employer through:

  • money, or
  • non-monetary benefits, i.e. perquisites

Money has been kept out of the definition of goods/services. Thus, it is neither goods nor services and will be outside of GST. If money was not specifically excluded (i.e. was part of goods or services), then it would have possibly suffered GST too.

Non-monetary perquisites do not enjoy any such relaxation. Such benefits extended by the employer to the employee during employment will be subject to GST. There are several non-monetary benefits that one can think of, namely:

  • Food coupons
  • Rent free accommodation
  • Use of assets/facilities
  • Gifts
  • Interest-free loans

These supplies shall be subject to GST whether there exists a consideration (e.g. employment services could be considered as quid-pro-quo for remuneration received) or not (gratuitous, i.e. gifts where there is no consideration involved). Let us look at both the cases one by one.

Where there exists a consideration:

Employment services rendered by the employee to the employer can be construed to be consideration for the benefits extended by the employer. The term 'consideration' has been defined under Sec. 2(31) to include 'any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both'. Thus, non-monetary consideration is still consideration under GST.

Employment services are non-monetary in nature and would be consideration under GST. Benefits provided by the employer are against this consideration and hence will be subject to GST. These transactions will be scrutinized keenly as they are transactions between related parties (please see explanation to Sec. 15(3) where employee and employer are categorized as related persons) and thus, the value will have to be at open market/fair terms.

Where there exists no consideration:

Gifts fit this definition well as they are gratuitous in nature. Supply between related persons, even without consideration shall be subject to GST and this has been elaborated in Schedule I. However, Schedule I(2) has a carve out for gifts where the value is less than Rs.50,000. If the value of a gift is more than Rs.50,000, the entire amount shall be subject to GST. The power to tax these transactions comes from Sec. 7(1c) which states that 'activities specified in Schedule I, made or agreed to be made without a consideration' shall be subject to GST.

Interestingly, transactions in money involving loans are specifically exempt from GST. The GST rate notification for services has excluded services by way of loans in so far as the consideration consists of interest.

Employee Reimbursements

Reimbursements to employees is a hotly debated topic. Two views exist on this matter:

  • that reimbursements towards official expenses should not be subject to GST as the employee has rendered those services in the course of employment
  • that reimbursements represent purchases from unregistered dealers and thus, will be subject to GST

While the first opinion is aggressive, the second is safer from the viewpoint of compliances. We should take a stand on a case-to-case basis.

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