2021 (1) TMI 431 - AAR - GST

100% EOU - Levy of GST - recovery of Notice Pay from the employees who are leaving the company without completing the notice period - Service of notice for termination of contract - three months notice mandatory for all employees/employer - as per contract, the company is entitled to recover the notice pay from the agreed portion of salary to compensate the loss to company, if notice not served correctly - HELD THAT - Employees who resign from their job are expected to serve notice period as mentioned in the appointment letter i.e. three months. If the employee does not serve such notice period, the salary of the unserved portion of notice period is retained by the employer, which is called as Notice Pay Recovery - the said Notice Pay is nothing but the amount stipulated in the employment contract for breach in serving (not serving) the stipulated notice period. In other words, notice pay is a sum mutually agreed between the employer and the employee for breach of contract. It can 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. GST is applicable on supply of taxable goods or services. Section 7(1) of the CGST Act, 2017, includes activities referred to in Schedule II in the scope of supply. Clause 5(e) to Schedule II to CGST Act 2017 , declares that 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' shall 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 forms part of the terms and conditions of employment. This would mean that the employee while accepting the offer of employment, has not only understood the intent on the part of the employer in prescribing this exit condition, but has also accepted it. Thus, the applicant is 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.

Summary

Issues involved:
1. Liability to pay GST on recovery of Notice Pay from employees leaving without completing notice period.

Detailed Analysis:
1. The applicant, a 100% Export Oriented Unit, sought an advance ruling regarding the liability to pay GST on recovery of Notice Pay from employees not completing the notice period. The company's policy required a three months' notice or notice pay in lieu of notice period for termination, with recovery of notice pay if the employee fails to serve the notice period.

2. The applicant argued that Notice Pay is a consideration for breach of contract, not a separate supply, as per the Indian Contract Act, 1872. They contended that it falls under the entry of services by an employee to the employer, not subject to GST as per Schedule III of the CGST Act, 2017.

3. During the hearing, the applicant's representative reiterated their stance, citing precedents where notice pay recovery was not subject to service tax. They referenced a Madras High Court order and other case laws to support their position.

4. The Authority considered the applicant's submissions, emphasizing that the CGST and GGST Acts are similar. The key issue was whether the recovery of Notice Pay attracts GST, as per the terms of the employment contract.

5. The Authority noted that Notice Pay is a sum agreed upon for breach of contract, falling under the definition of supply as per Schedule II of the CGST Act, 2017. The transaction of tolerating an act (quitting without notice) for a sum (notice pay) is deemed a service under Clause 5(e) to Schedule II.

6. Referring to a Madras High Court case, the Authority found that recovery of notice pay does not constitute a taxable service as it does not involve the employer rendering any service. However, the Authority held that the applicant is liable to pay GST on recovery of Notice Pay at 18% under the category of "services not elsewhere classified."

7. The Authority distinguished the cited case laws related to service tax disputes, stating they are not directly applicable to the GST levy issue at hand. The ruling affirmed the liability of the applicant to pay GST on recovery of Notice Pay from employees not completing the notice period as per the contract.

This detailed analysis provides a comprehensive overview of the judgment, addressing the legal arguments, interpretations, and findings related to the issue of GST liability on recovery of Notice Pay.