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Guide to Goods and Services Tax

on Employee reimbursements
CA Gaurav Gupta
FCA, LLB, DISA P a g e |2

Contents

1. Introduction .......................................................................................... 3

2. Who is an employee ........................................................................... 3

3. Services of employee are not Supply of goods or services ......... 4

4. GST on various kinds of considerations / reimbursements given


to an employee in the course of his employment ......................... 5

5. GST on various kinds of considerations / reimbursements given


to an employee in relation to his employment ............................. 10

6. Supplies from employer to employee ............................................ 10

7. GST on employee Purchases ......................................................... 13

8. Implications of certain important transactions .............................. 14

9. Disclaimer .......................................................................................... 18

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1. Introduction

GST has opened a series of debate on many issues in India regarding the levy
of GST. Amongst many, one of the most deliberated issues has been the levy
of GST on provision of goods or services to or by employee or reimbursements
made to employees. The foregoing guide explains the underlying facts of the
transactions, provisions of the GST law and exigibility of such amounts (paid
between employer / employee) under GST.

2. Who is an employee

An Employee has been defined by many dictionaries, some of the definitions


are as under:
- someone who is paid to work for someone else -
http://dictionary.cambridge.org/
- one employed by another usually for wages or salary and in a position
below the executive level - https://www.merriam-webster.com/

Another site, www.invetorwords.com defines an employee as a person who is


hired to provide services to a company on a regular basis in exchange for
compensation and who does not provide these services as part of an
independent business.

It is important to note that while employee includes whole time and Managing
Directors, Independent directors are not employees of the Company. Similarly,
contractual labour would also not be categorised as employee. Persons who

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are engaged on exclusive secondment can be categorised as employee,


provided their employment is shifted from the principal employer for the period
of secondment.

3. Services of employee are not Supply of goods or services

As part of Schedule III of Central GST Act, 2017 (CGST Act), Services of
employee has been considered as neither supply of goods, nor supply of
services. The relevant portion of the CGST Act reads as under:

Section 7:
(2) Notwithstanding anything contained in sub-section (1),
(a) activities or transactions specified in Schedule III; or
..
shall be treated neither as a supply of goods nor a supply of services.
Schedule III
1. Services by an employee to the employer in the course of or in
relation to his employment.

Accordingly, any services by an employee in the course of or in relation to


his employment shall not be considered as Supply and shall not be exigible to
GST. It is pertinent to mention that any activity which is not a supply for the
supplier shall also be taken in the same spirit for the recipient and thus, no GST
is payable on such amount under reverse charge as well. The exclusion is to
all services when they are undertaken in the course of or in relation to his
employment. Thus, we should first understand what constitutes in the course

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of or in relation to. The two terms are not new and have been deciphered by
the Courts.
We shall now proceed to discuss the levy on the various kinds of considerations
/ reimbursements given to an employee hereunder.

4. GST on various kinds of considerations / reimbursements


given to an employee in the course of his employment

The phrase in the course of employment contemplates an integral relation or


bond between the services provided by the person and the contract of
employment. Services provided by such person are inextricably linked up with
the terms of employment and are originating and are binding only in terms of
hum being employed. Thus, any supply of service which is in pursuance of the
contract of employment shall be said to be provided in the course of
employment and shall be outside the purview of employment.

The major components of consideration paid to an employee for services in the


course of his employment include Basic Salary, Allowances and Perquisites.
We shall discuss the same hereunder.

4.1. Basic Salary


Basic Salary and all components of Salary including Allowances and
Perquisites are paid in lieu of services of employee in the course of his
employment and thus are not taxable under GST.

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4.2. Allowances
Allowances include three categories of allowances allowances forming part of
Salary, compensatory allowances, allowances for official duties. We shall
discuss each of the three categories hereunder:

a. Allowances forming integral part of Salary


The various kinds of allowances as are included in Salary are as under:
- House Rent Allowance
- Children Education Allowance
- Hostel Expenditure Allowance for children
- Any allowance paid or allowed by Government to its employees posted
outside India
- Allowances to Judges of High Court/Supreme Court
- Compensatory allowance received by a Judge under article 222(2) of
the Constitution
- Salary and allowances received by a teacher /professor from SAARC
member state
- Fixed Medical Allowance
- Tiffin/Lunch /Dinner/Refreshment Allowance
- Dearness Allowance
- Overtime Allowance
- Telephone Allowance
- Holiday Allowance
- Any Other Cash Allowance forming part of Salary

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Since the above allowances form part of Salary for services provided in the
course of employment, they are not exigible to GST. It is important to mention
that the above allowances forms part of Salary for the purpose of Income Tax.

b. Compensatory Allowances
Following Compensatory allowances are also not exigible to GST and have
been recognised as only a form of Salary:
- Transport Allowance is granted to an employee to meet expenditure on
commuting between place of residence and place of duty
- Special compensatory Allowance (Hilly Areas)
- Border area allowance / Tribal area allowance / Compensatory Field
Area Allowance / Compensatory Modified Area Allowance / Counter
Insurgency Allowance / Underground Allowance / High Altitude
Allowance / Highly active field area allowance / Island Duty Allowance
/ City Compensatory Allowance
- Allowance granted to an employee working in any transport business
to meet his personal expenditure during his duty performed in the
course of running of such transport from one place to another place
provided employee is not in receipt of daily allowance
- Entertainment Allowance received by the Government employees

c. Official Allowances
Certain allowances are given to employee for official expenditures and are not
taxable to the extent such expenses are made for official purpose, such as:
- Conveyance Allowance granted to meet the expenditure on
conveyance in performance of duties of an office

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- Any Allowance to meet the cost of travel on tour or on transfer


- Daily Allowance to meet the ordinary daily charges incurred by an
employee on account of absence from his normal place of duty
- Helper/Assistant Allowance
- Research Allowance granted for encouraging the academic research
and other professional pursuits
- Uniform Allowance

In above cases, the expenses are made in official capacity and the above
expenses are not for personal consumption of the employee. They are paid in
lump sum to provide flexibility to certain employees to expend money within a
particular range for business purpose so that they are not short of funds and
business in not hindered in its natural course. Thus, in above cases, employee
acts a agent of the employer for such expenditure and such allowances are
considered as business expenses and not part of the Salary to the extent such
expenses are for official purpose. Accordingly, portion of Salary which relates
to official purpose shall be considered as expenditure by employer and GST
implications should flow as if employer has made such expenses. It is
immaterial whether the invoices are in the name of the employee or employer.
However Input tax credit can only be availed when proper GSTIN of employer
is mentioned on such invoices. Also, in case of procurement of such supplies
from unregistered supplier, the liability to pay under reverse charge shall fall on
employer. Thus, it is proper to records such expenses when said to be
expended on official purpose. In other case, when such amount is not used for
official purpose and paid to employee, such amount forms part of taxable Salary
of the employee and thus, no GST shall be applicable on such amounts.

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4.3. Perquisites
The following perquisites being a part of Salary are not taxable in GST not being
a Supply:
- Rent Free Accommodation
- Supply of Gas Water, Electricity etc
- Free or Concessional Educational facilities of employees family
members.
- Income Tax of Employee
- Professional Tax of employee
- Salary of servant employed by employee
- Reimbursement of Medical Expenditure
- Free meals provided during office hours
- Club Facility
- Leave Travel Concession
- Telephone / Mobile
- Medical / Recreational Facilities
- Stock options
- Education/ Training or refresher course for employees
- Car Provided by Employer for personal use of employee

While, such supplies to employee are only a form of consideration for employee
services, procurement of such supplies from any unregistered supplier would
make employer exigible for payment of GST under reverse charge. It is
important to mention that certain supplies like rent free accommodation are
exempt under GST and thus, no GST is payable under reverse charge also.

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It is important to mention that even though the provision of such goods/ services
shall not constitute supply between employer and employee, however, any
payment made by employer for procurement of such supplies from a third
person would attract GST and in case such supplier is not registered, the
employer would be required to pay GST under reverse charge. For eg. Car
taken on rent from a third party and given to employee shall be exigible to GST
in the hands of employer.

5. GST on various kinds of considerations / reimbursements


given to an employee in relation to his employment

There are many considerations which are given to an employee which are
beyond his term as an employee and may not fall within the ambit of in the
course of employment, but such amounts shall not be exigible to GST when
they are in relation to employment. Type of such amounts are as under:
a. Pension and other retirement benefits:
b. Earned leaves
c. Ex-gratia payments
d. Leave Travel Concessions

6. Supplies from employer to employee

Another important question which needs to be answered is whether the


provision of goods / services from employer to employee shall constitute Supply
and whether such supply shall be exigible to GST. In terms of perquisites, no
supply is made by an employer when employer makes such goods / services

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as perquisites to employee. In these cases, the supply is made by the persons


supplying such goods / services and are enjoyed by employee while payment
is made by the employer. However, since the same are procured in the course
of his business, when such supplies are procured from unregistered supplier,
employer shall be bound to pay tax on such expenditure.

Gifts from employer


It is important to mention that gifts not exceeding fifty thousand rupees in value
in a financial year by an employer to an employee shall not be treated as supply
of goods or services or both. Thus, provision of gifts at the time of any function
/ festival when such gift does not exceed Rs 50,000 per employee per annum,
shall not be considered as Supply.

Provisions by employer as supplier


However, when the employer provides any other goods / services in his own
capacity, such provisions shall be categories as Supplies and employer shall
be liable to pay GST on such supplies. Some of the examples of such supplies
include:
- Transfer of movable assets after a certain period of use for no
consideration or at a value which is below fair market value of such
goods
- Goods / Services which is provided by employer as part of his business
to his customers and such services are also provided to employees free
of cost / at concessional price
- Use of Immovable / Movable Assets for personal use of employees

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In above cases, employer has to discharge GST under forward charge as a


supplier. It is important to mention that the supply may not have proper
consideration and thus, the tax shall be paid at fair market value as provided in
Determination of Value Rules.

Provision to all employees


The following services being provided to all employees shall not fall within the
ambit of taxability:

Transaction GST Implication Remarks

Group medical No individual benefit, Company pay for


/Personal Accident accruing only to an insurances and invoice
insurance taken by employee, no GST on raised by insurance
Company for all / such benefit when company to company.
certain class of given on employees
employee

Health Check up No individual benefit, Company organise


Facility accruing only to an health check up for their
employee, no GST on employees and GST is
such benefit when charged by vendor if
given on employees applicable

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Free Food to No Supply by Company Company pay to caterer


Employees by as no intention of and caterer supply foods
appointing caterer employer to supply to employees and
such services to subsidised cost. No Input
employees as supplier. Tax Credit to Company
Part of employee
perquisites.

Food on payment Company supplying Caterer charges


basis by company food to employee, liable Company GSt on its
to employee to pay GST supply of services which
shall be available to
Company as Input Tax
Credit

7. GST on employee Purchases


It is a general practise whereby the employees purchase goods or services on
behalf of their employers, for example, travel and food expenses when are away
on business, buying fuel, expending for other business needs etc. Amount can
be used from imprest given to employee, corporate credit given to him or such
expenses can also be claimed back as reimbursements.

GST when invoices are in the name of the Employer


When the invoices for such expenses are in the name of the employer, it is
amply clear with both parts that GST has to be borne by the employer. If the
supplies are received from registered supplier, the Input tax credit shall be

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received by the employer when GSTIN of employer is mentioned properly on


the invoice. In case of unregistered supplier, the employer has to pay GST
under reverse charge.

GST when invoices are in the name of the Employee


Since the expenditure is made by employee, in many cases it is found that such
invoices are issued in the name of employees and thus, even when purchased
from a registered supplier, the invoice is not in the name of the employer.

8. Implications of certain important transactions


We shall now discuss the various expenditures which are made by employees
on behalf of employer and claimed as reimbursements and GST treatment
thereof:

Transaction GST Implication Remarks

Cab Facility No Supply by Company Cab provider charges


provided to as no intention of company GST, else
employee for to and employer to supply reverse charge
from home by such services to applicable on Company.
engaging a third employees as supplier. No Input Tax Credit
party Cab provider available to Company

Mobile handsets to No GST as no supply. Input Tax Credit available


employees for Property used by to Company
official purpose employee for official
purpose. However,
when transferred to

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employee, shall
constitute supply

Mobile bill Since they are procured


reimbursement for official purpose from
when bill in the a registered supplier, a
name of employee position may be taken
that such expenses are
not taxable under GST

Sale of Used Fixed GST Applicable on Input tax may not be


Assets - Old such supply of goods to reversed if GST is paid
Laptops/Vehicles employees on output supply
etc sold to
employee

Gift to Employee - In case of value of such No Input tax credit on


Diwali Gift, Birthday Gift exceeds Rs such gifts can be availed
Gift Etc 50,000/- p.a. GST is by Company when no tax
applicable is paid on output supply

Company Car to GST not Applicable as No Input tax credit on Car


Employees for no supply. Car made available to Company.
official use available for official use Payment of GST to third
person if such car or
services is received from
such person. No Input
tax credit on such input
services.

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Company Car to GST may be Applicable No Input tax credit on Car


Employees for both as car is supplied for available to Company.
official and use other than business Payment of GST to third
personal use and thus, GST may be person if such car or
charged. If however, services is received from
same is considered as such person. No Input
part of Salary and tax credit on such input
perquisite is made services.
taxable under Income
tax, no GST.

Employee Referral GST applicable as


Fees amount paid procurement from
to employee for unregistered supplier
referring another
person for
employment in
Company

Notice Pay GST to be paid on


recovery - Notice amount recovered as
pay recovered from Notice pay by the
employee leaving Company
company

Long Service GST applicable if not


Award - Company forming part of salary
provided award for
long service

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Guest house GST Applicable,


accommodation - valuation shall be
Guest house is considered at fair
always a market
commercial
property and a
license has to be
taken

Supply of Uniform No GST GST charged by supplier


official use of uniform to Company
and shall be available to
Company as Input tax
credit

Product / Services GST applicable on fair


of company given market Value
to employee at
discounted rates

Employee Own Car Company has to


reimbursement deposit GST under
when used for reverse charge
official duty considering employee
as unregistered
supplier

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9. Disclaimer

Due care and diligence have been taken while editing and publishing of this
Guide. The author does not hold any responsibility for any mistake that may
have inadvertently crept in. The author shall not be liable for any direct,
consequential, or incidental damages arising out of the use of this Guide.
In certain parts of the Guide, the views expressed are personal views of the
author and are no authority in law. To avoid any doubt, readers are
suggested to cross check the contents with original government
publications.

The Guide is based on the understanding as envisage above. If there is


any change in the understanding, our comments may vary significantly.

This Guide is restricted to issues under GST on employee consideration /


reimbursements. No other direct or indirect tax issues have been
examined.

The comments in this memorandum are purely a matter of interpretation


and not binding. The tax authorities may take a different view.

The author has no responsibility to update this Guide, unless specifically


requested. This Guide is based on the statutory/legal positions including
judicial and administrative interpretations thereof prevailing upto and
inclusive of the date of the Guide.

This Guide is solely for the information purpose. The Guide may not be
used for any other purpose, or distributed to any other party, without prior
written consent.

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Gaurav Gupta
All rights reserved

CA Gaurav Gupta
B.Com (Hons.), FCA, LLB, DISA
Partner
MGS & Co.
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No part of this publication may be reproduced or transmitted or stored in any


form or by any means including but not limited to electronic, mechanical,
scanning, photocopying, recording, or stored in any system for use of any
nature without the written permission of the author. Breach of any of the above
conditions is liable for legal action.

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