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Applicability of GST on Employees Reimbursement and Allowances

Tax Assessment  Expert
Author: Jay Parekh
Posted On: Wednesday 12 July 2017

Tags: GST RCM Employee Allowance pure agent reimbursement gifts

How will Employee Reimbursements, Allowances and Gifts be treated under GST Law?

Legally services given by employee to the employer shall not considered as supply of. This is specific exception carved out under clause 1 Schedule III of CGST Act.

This means the consideration paid by employer for providing SUCH SERVICE provided by the employee shall not be taxable. This can be Cash or even Kind as been contracted between the employer and the employee.

So even a free housing, membership of a club, subscription for health and fitness centre shall be not be taxable if provided in the course of regular employment obligation.

One may note that Employer and Employee are Related Persons as defined under the Sec 15 CGST Act. 

From this point of view, over and above the contractual obligation under the employment contract, Gifts by the employer to employee upto Rs. 50,000 are exempt. The corresponding credit for such gifts shall also not be available.

  1. One of the issues is to define Gifts? As per a recent press note issued by the ministry of finance, gift is one which is
    1. Voluntary in nature
    2. Comes occasionally
    3. Cannot be demanded as matter of right

Gifts like Diwali Gift, Farewell Gift may fit in this category.

The press note released by CBEC on this topic can be referred http://www.cbec.gov.in/htdocs-cb...

A thumb rule to check this one otherwise can be that the Gift shall be offered to tax by such employee and Income Tax TDS provisions are also applicable on the same.

  1. Other question is about the allowance of different nature like “per day allowance” or “Daily Allowance” for lunch, travel, etc which are agreed between the employer and the employee on the basis of certain criterion?
    1. Here the allowance itself means no bills or receipts required to be produced by the employee for the spending. The outflow is fixed. The employee at his / her discretion use the money with any vendor of his / her choice. The control on such spending shall not be with the employer.
    2. Since, this is part of obligation of the employer to the employee in a specific condition and is also as per the organisational policy, it may NOT be subjected to GST. Once this is not subjected to GST, the question of RCM or Reverse Charge on such allowances does not arise. This means that RCM compliance is NOT required in the allowance scenario in my personal view.
    3. I would like to draw the attention of the readers that under Section 10(14) of the Income Tax Act, the allowances of such nature shall be exempt from tax to the extent of proof of spending or flat allowances as specifically covered by the Rule 2BB of the Income Tax Rules, of the same for such cause for which they are given. For example, let’s look at Travel allowances to the employees of a transport company under this rule is exempt upto 70% of such allowance or Rs. 10,000 whichever is lower. One may look at this rule to search for more such allowances which are exempt under the Income Tax.
  2. What will be the status of reimbursement on production of bills by the employees? What are the steps for filtration of transactions requiring RCM
    1. The employee here partakes the character an agent for the purpose of these transaction. He just does the spending on behalf of the employer and hence such transactions are to be handled as if the employer himself is doing such expenses. Hence the transactions which are to be taxed under RCM u/s. 9(3) and 9(4) of the CGST Act shall be taxed even in reimbursement scenario.

 What are the steps to be followed for filtering the RCM transactions under GST law and making the payments for the same?

  1. Here one may bifurcate the transactions into taxable and non taxable at the first level. Non taxable include spending on exempt goods or services like petrol, metered cabs, auto rickshaw, non-AC railway fare, etc. such items shall be deduced.
  2. Than one may carve out the services in the specified categories like “Goods Transport Agency (GTA)”. One may pay tax according to the applicable rates provided
  3. On the remaining items, one may first deduce the bills which are from the registered dealers and claim available credit subject to prescribed conditions. The tip here is to get all the bills with proper GSTIN of the company for smoother claiming of credits.
  4. On the remaining bills, one may prepare the “Self Invoice” and charge tax accordingly to make the payment of the same. Credit of such tax paid is again available subject prescribed conditions.
  5. One may also take the benefit of exemption from discharging RCM liability due to supplies availed from unregistered dealer, if aggregate values of all the supplies from unregistered dealers are below Rs 5000 per day whether directly availed or availed by the employee which the company shall reimburse.  

Please feel free to write to us at jay@apmh.in for any further queries on the above blog.

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