GST on services provided by employers

 

The Authority for Advance Rulings (AAR) in GST, Maharashtra bench, has ruled that GST is not payable on amounts recovered from employees for transportation provided from their homes to the workplace. This was one of the issues decided in Order No. GST-ARA-23/2019-20/B-46-Mumbai, dated 25-8-2020 in Application No. 23 of Tata Motors Limited. The AAR had two reasons for its conclusion that the amount does not attract tax: (i) that the company was not providing the service of transportation to its employees; and (ii) that transactions in an employer-employee relationship do not attract GST in view of the first entry in Schedule III of the CGST Act. In the words of the AAR:

In the subject case we find that the applicant is not providing transportation facility to its employees, in fact the applicant is a receiver of such services in the instant case. The applicant’s contentions that they are eligible for exemption from GST under Sl. No. 15(b) of Notification No. 12/2017-Central Tax (Rate), dated 28-6-2017 in respect of nominal amounts of recoveries made from their employees towards bus transportation service, is not correct. The exemption under the said notification is available only when the supply is taxable in the first place. In the subject case, the transaction between the applicant and their employees, due to “Employer-Employee” relation as stated by the applicant in their submissions, is not a supply under GST Act.

 

To answer the second question we now refer to Schedule-III to the CGST Act which lists activities which shall be treated neither as a supply of goods nor a supply of services. As per clause 1 of the said Schedule-III, Services by an employee to the employer in the course of or in relation to his employment shall be treated neither as a supply of goods nor a supply of services.

 

Since the applicant is not supplying any services to its employees, in view of Schedule-III mentioned above, we are of the opinion that GST is not applicable on the nominal amounts recovered by applicants from their employees in the subject case."

While the ruling has been welcomed by industry, it is binding only on the parties to it. Hence, it will be prudent to examine the reasoning in this order before we settle into complacency on the issue.

Schedule III of the CGST Act (“the Act”), on which the AAR has placed reliance, excludes “services by an employee to the employer in the course of or in relation to his employment” from the scope of GST. The service excluded are those provided by an employee to an employer. The converse situation, of service by an employer to an employee, is not covered. Because it is not covered, there have been issues like the taxability of recovery of notice pay, in which there is already an AAR ruling that it is taxable in the hands of the employer.

The whole thing now hinges on a CBEC clarification which obviously does not have the authority of law: by a circular dated 10 July 2017 the CBEC had instructed its officers that “supply by employer to the employees in terms of contractual agreement of employment entered into between employer and employee (which are treated as a part of salary/cost to company), will not be subject to GST”.

The other reason given by the AAR is that the company is not providing the service of transportation to its employees, in fact it receives the service (from an outside service provider). This raises the old question of what is service and who is to be considered as providing it. Let us look more closely at this.

Service is defined simply in GST as anything that is not goods, money or security. This is to be read in context and harmoniously with section 7 of the Act. For example, the sky is not service merely because it is not goods, money or security. However, if there is a transaction in which an amount paid is a consideration for something, and that something is not goods, it is a service.

In the case of an employer charging the employee a nominal amount for transportation from home to the workplace, there is something for which the amount is paid. That something is not goods, it is in fact a service. The employer is not actually transporting the employee, an external service provider is being paid to do so. But the employer is arranging for this. This is the nature of the service provided by the employer to the employee. (In service tax, procuring a service for another person was explicitly listed as a service under ‘business auxiliary services’.) As per the definition in section 2(93)(a) of the CGST Act, “recipient” of a service is the person who is liable to pay for it: accordingly, the employee, who has to pay the employer for this service, albeit a nominal amount, is the recipient of service from the employer.

Transport is not the only service arranged by employers for their staff and workers. Food and medical services in an in-house clinic are also commonly arranged in large industrial establishments. When they are considered taxable, the question of their valuation poses a problem, because an employee is a ‘related person’ and transaction value is not accepted as the taxable value under section 15. The GST Council would do well to advise the government to exempt all such services by employers.