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January 15, 2021

Leaving your job without serving the notice period?Now you will pay 18% GST on recovered pay

by CA Shivam Jaiswal in GST, Legal Court Judgement

Leaving your job without serving the notice period?Now you will pay 18% GST on recovered pay

GST is a unified, destination based indirect tax. It is imposed on the value added to goods as well asservices at each stage of the supply chain. The purpose behind implementing GST was to create aunified market in the country. Therefore, many indirect taxes were subsumed and the taxcompliance was reduced to achieve this purpose.

The Gujarat Authority of Advance Ruling recently held that an employee exiting a company without completing their notice period would be liable to pay 18% GST on recovery of the pay. This ruling was passed in the case of Amneal Pharmaceuticals Pvt. Ltd. (GST AAR Gujrat). Let us refer to this case to understand that why wasapplicant liable to pay GST on recovery of Notice Pay from the employees who were leaving the company without completing the notice period as specified in the Appointment Letter issued as per the contract entered between Employer and the Employee.

Facts of the Case:

  • The applicant was a 100% Export Oriented Unit (EOU) engaged in the manufacturing of pharmaceuticals products.
  • They, at the time of appointing any employee at their factory entered into a contract with employees by issuing “Appointment Letter”.
  • Under the appointment letter, it was clearly mentioned that, either parties would serve a 3 months mandatory notice to terminate this contract.
  • In case, if any employee did not serve the notice period after tendering the resignation, then as per contract (Appointment Letter) condition, company was entitled to recover the notice pay from the agreed portion of salary to compensate the loss to company.
  • Therefore, by virtue of the aforesaid condition, in case employer decided to terminate services of any employee without notice period, he was obliged to pay the notice period salary to the employee to enable him to sustain himself till he finds suitable employment.

Observations of AAR

  • In this case, issue to be decided was whether the applicant was liable to pay GST on recovery of Notice Pay from the employees who were leaving the company without completing the notice period as specified in the Appointment Letter issued as per the contract entered between them.
  • Employees who resigned from their job were expected to serve notice period as mentioned in the appointment letter i.e.,3 months.
  • If the employee did not serve such notice period, the salary of the unserved portion of notice period was retained by the employer, which was called as “Notice Pay Recovery”.
  • AAR found that said Notice Pay was nothing but the amount stipulated in the employment contract for breach in serving (not serving) the stipulated notice period.
  • In other words, notice pay was a sum mutually agreed between the employer and the employee for breach of contract.
  • It could be regarded as a consideration to the employer for “tolerating the act” of the employee to not serve the notice period, which was the employee’s agreed contractual obligation.
  • Also, GST was applicable on supply of taxable goods or services.
  • Section 7(1) of the CGST Act, 2017, included activities referred to in Schedule II in the scope of supply.
  • Clause 5(e) to Schedule II to CGST Act 2017, declared that ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’ would be treated as supply of service.
  • The condition to pay an amount as notice pay in lieu of notice period, for the employer to agree to let go an employee, normally formed part of the terms and conditions of employment.
  • This would mean that the employee while accepting the offer of employment, had not only understood the intent on the part of the employer in prescribing this exit condition, but had also accepted it.
  • In other words, the employee had understood and accepted the condition that in the contingency of his inability to provide the prescribed notice period, he could exercise the option of paying the notice pay as the consideration for the employer to agree to the obligation of letting him go, which the employer was bound to do as it is part of the terms and conditions already agreed to and settled between them.
  • In AAR’s view, therefore, this transaction of the employer agreeing to the obligation of tolerating an act (quitting without any advance notice) on the part of the employee, for payment of a sum (notice pay), would be covered under Clause 5(e) to Schedule II to CGST Act 2017, as a declared service.

Therefore, AAR held that the applicant was liable to pay GST @ 18% under the entry of “services not elsewhere classified, on recovery of Notice Pay from the employees who are leaving the company without completing the notice period as specified in the Appointment Letter issued as per the contract entered between them.

Hence, now leaving your job without serving the stipulated notice period will now cost employees 18% GST on the pay recovered for the notice period duration.

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