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18 percent GST if employee exits without completing notice period

·        Recent decision by the Gujarat Advance Rulings Authority (GAAR) has ruled for imposing 18 percent GST on the recovery of notice pay from employees who miss serving this time. An equivalent 5 percent GST is also applicable on food served in canteens.

The Gujarat Advance Rulings Authority (GAAR) has held that an employee leaving a employment will be liable to pay 18 percent on Goods and Services Tax (GST) on the recovery of pay without finishing their notice period. This was in a case of  Amneal Pharmaceuticals, an Ahmedabad-based export firm, requesting an advance ruling on the question of quitting their job without completing the three-month notice period.

Industry analysts have suggested that this indicates that Notice Period is not exempted from GST. However, the payment of this will vary on the basis of the employment terms and interpretations by the tax authorities.


MS Mani, Senior Director, Deloitte India, said that it is not feasible to certify the transaction on which Goods and Services tax is applicable in the GST law because there are far too many transactions all over the country. General advice is provided by GST Law.


“Advance Ruling authorities interpret that law in a specific situation. In this case, they have interpreted it to say that since serving the notice period was a service, the notice pay of the employee should be attracting GST,” Mani added.


What should be remembered is that in a particular case, this was a ruling and will not be the same with all cases in which a corporate employee fails to complete the notice period. Even though GST is applicable, a determination would be made based on the work contract and conditions set by particular firms.


For example, if the notice period pay is Rs 2 lakh, then the 18 percent GST would mean an additional burden of Rs 36,000. This would be recovered from the employee when they skip the notice period since it amounts to a person promising a service and not offering it.
Employees must therefore be doubly sure of the payment terms and sign the letter of offer only after thorough verification. This will help avoid penalty payments relating to GST.


What about food served in the canteen of the office? There is also a big controversy about whether GST will be applicable at even a cost to employees for corporate services such as canteen. According to Section 46 of the Factories Act, 1948, any factory employing more than 250 workers is required to provide a canteen facility to its employees.


Senior Director said that GAAR has decided in another recent decision that the employer is liable to pay GST on canteen food served to its employees for which the latter pays a fee. The GST is set at 5 percent on canteen food. This would mean that the tax payable by the employer to the GST authorities, would be recovered from the staff in the form of higher prices.


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