However, in a contrasting ruling, the Hyderabad office of the Customs, Excise and Service Tax Appellate Tribunal, while determining the eligibility to avail of the input tax credit on services procured to provide facilities to employees, held that to the extent of the amounts recovered from employees, the employer-employee relationship does not exist. They step into the shoes of a service provider and a service recipient in such a situation.
Very often companies get generous and present end of the year gifts, bonuses, and other employee benefits during the holidays. Did you know that these end of the year bonuses could cost you in tax liabilities?
Since the scope of services under India’s Goods and Services Tax has extensive coverage and encompasses all forms of supply, with deemed inclusions and specified exclusions, the question of whether or not year-end gifts or prerequisites are taxable is still debatable. In legal terms, a prerequisite is defined as a non-cash benefit granted by an employer to its employee. As specified by the Income Tax Act, it is a benefit that an employee avails of or is entitled to on account of the employee’s job or position within an enterprise.
Since services by an employee to an employer fall outside the purview of the Goods and Services Tax, the law follows that supply by the employer to the employee is made as per terms of a contractual agreement and therefore will not be subject to GST.
However, the law also states that GST applies to the supply of goods and services. As per GST laws, supply includes all sale, transfer, exchange, barter, license, rental, lease, or disposal – made for consideration and shall be in the course or furtherance of a business. Supply can be from employee to the employer or from employer to its employees. Any supplies made by an employer to its employees will be taxed under GST.
Back in 2017, the GST Council had issued a press release clarifying that supplies made by the employer to the employee in terms of the employment agreement will not be subjected to GST. Unfortunately, this clarification did not yield the desired result, and whatever clarity it offered was rendered moot by clashing AAR rulings.
In separate rulings, the AAR benches of Kerala, Gujarat, and Haryana have held that the provision of cafeteria or canteen facilities to employees falls undersupply. This is because the supply of food is a transaction incidental to the main business and furthers the company. In a different ruling, the Maharashtra and Uttar Pradesh benches of the AAR held that recovery made towards premium paid for medical insurance does not fall undersupply as it is not connected to the main business. The same benches of the AAR, in different cases, held that the provision of transport facility was not considered as supply as it didn’t further the business – but the Haryana AAR passed a contrasting ruling stating that the transaction furthered the business.
Contrasting AAR rulings on what falls under the purview of supply in an employee-employer transaction and vice versa have led to several businesses waiting for directives from higher jurisdictional authorities like High Courts and the Supreme Court.
Eliminating bonuses and benefits can lead to a severe fall in employee morale and is not an option for most businesses. In a time when employee recruitment is more expensive than employee retention, companies prefer to have employees stay longer than hire new resources. The lack of clarity on whether or not bonuses, gifts, or other prerequisites fall undersupply leads businesses getting creative during the holidays. Instead of offering bonus amounts to their employees, employers provide their employees alternative benefits, including rewards like staycations, gym memberships, subscriptions to entertainment platforms like Amazon and Netflix, high discounts on company products like smartphones, tablets, clothing, etc.
While alternative gifting seems like a good solution, it is likely to be short-lived and limited to a specified amount. Remote working has already shown a drop in employee morale. Businesses will have to keep coming up with innovative employee benefits to ensure better employee retention until the GST council irons out the saga on taxable prerequisites.
Note: This is an opinion piece by Anil Paranjape, Director, Avalara India.