Challenging Case Studies.
Research Document Studies.
GST is leviable only when an activity
is constituted as a Supply u/s 7 of the CGST Act. In other words, GST is applicable on supply of taxable goods or
The section 7 of the CGST Act relating to Scope of Supply under the GST Law has
been amended on 01-02-2019 retrospectively w.e.f. 01-07-2017. The issue of
leviability of GST on Notice Pay Recovery hence
needs to be analysed considering the scope of supply prior to the amendment and
post the amendment carried out in section 7 of the CGST Act. First of all, let us understand the
definition of term “Supply”.
Below is the Relevant Extract of
Section 7 prior to the amendments :
“Section 7(1) - For
the purposes of this Act, the expression “supply” includes––
(a) all forms of
supply of goods or services or both such as sale, transfer, barter, exchange,
licence, rental, lease or disposal made or agreed to be made for a consideration
by a person in the course or furtherance of business;
(b) import of
services for a consideration whether or not in the course or furtherance of
(c) the activities
specified in Schedule I, made or agreed to be made without a consideration; and
(d) the activities to
be treated as supply of goods or supply of services as referred to in Schedule
Below is the Relevant Entry in Schedule
II which is having impact of GST on Notice Pay Recovery. Schedule II is for “ACTIVITIES [OR TRANSACTIONS] TO
BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES.”
“5- Supply of Services
The following shall be treated as supply of services, namely:—
(e) agreeing to the obligation to refrain from an act, or to tolerate an act
or a situation, or to do an act; and
As per the above
definition, there are certain transactions which are covered within the purview of Supply because of
inclusion of reference to Schedule II of the CGST Act 2017. Even though the
transactions are not in the nature of supply but by virtue of Schedule II, the
types of transactions which are mentioned under Schedule II are considered to
be Supply and GST could be levied accordingly.
Notice Pay Recovery is considered to be
a breach of employment contract in which the employee refrains to serve notice
period and the employee shall be compensating the loss due to the breach of contract
to the employer by paying an amount, say notice period is of one month and in
lieu of service of notice period, employee is supposed to pay one month salary
as per contract.
Prior to the
amendment in section 7 of the CGST Act it was conceived that the employer is
tolerating an act or situation due to breach of employment contract. Hence,
such tolerating an act or situation is covered under Schedule II. Further
schedule II is forming part of scope of supply and hence such transaction is
liable to GST under GST Law.
Now let us consider the Relevant
Extract of Section 7 Post amendments :
Section 7(1) For the purposes
of this Act, the expression "supply" includes—
all forms of supply of goods or
services or both such as sale, transfer, barter, exchange, licence, rental,
lease or disposal made or agreed to be made for a consideration by a person
in the course or furtherance of business;
import of services for a
consideration whether or not in the course or furtherance of business; [and]
the activities specified in Schedule
I, made or agreed to be made without a consideration
[(1A) Where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.]
Earlier, supply included the
activities to be treated as supply of goods or supply of services as referred
to in Schedule II. In Schedule II, there is an entry 5(e) which
states agreeing to the obligation to refrain from an act, or to
tolerate an act or a situation, or to do an act.
After amendment to
the act, the entry ‘d’ in section 7(1) "the
activities to be treated as supply of goods or supply of services as referred
to in Schedule II" has been omitted from the scope of Supply.
And the following sub
clause has been added:
(1A) Where certain
activities or transactions constitute a supply in accordance with the
provisions of sub-section (1), they shall be treated either as supply of goods
or supply of services as referred to in Schedule II.
The above amendments
are effective retrospectively from 1/7/2017.
While dealing with notice pay
recovery, it must be noted that it does not fit into the scope of “supply”
under clause (a) of sub-Section (1) of Section 7. Furthermore, the above
Amendment envisages that where certain activities or transactions constitute a
supply in accordance with the provisions of sub-Section (1), they shall be
treated either as supply of goods or supply of services as referred to in
In the normal course
of business, employer does not enter into contract with employee for tolerating
an act or situation. Notice pay recovery is paid by the employee for
non-fulfillment of stipulated conditions mentioned in the employment contract.
Such payment cannot be termed as consideration for supply of services as
neither the contract was entered for this nor such event is intended.
Further as notice pay recovery does not
fall within the forms of supply i.e. sale, transfer, etc. set out under
sub-Section (1) of Section 7, hence the primary conditions of sub-Section (1A)
is not satisfied and for that reason the transaction in question in the instant
case cannot be termed a “supply” within the meaning of Section 7 and therefore,
cannot be subjected to levy.
Hence, in our view
GST is not be leviable on the amount of Notice Pay recovered from Employees
based on the above discussions.
8. There are
couple of recent judgements related to applicability of Service Tax on Notice
Pay Recovery under the erstwhile Service Tax Law:
Court in Ge T & D India Limited v. Deputy Commissioner
Of Central Excise, Large Tax Payer Unit, Chennai, 2020-VIL-39-MAD-ST held that
employer has merely facilitated the exiting of employees and,
hence, notice pay recoveries cannot be considered as
elaborated on that Central Board of Excise and Customs (CBEC) in CBECs'
Guidance Notes dated 20.06.2012 states that provision of service by an employee
to the employer is outside the ambit of service. Accordingly, the employer
cannot be said to have rendered any service as he merely facilitated the
exiting of the employee by imposing cost upon him for the sudden exit. The
employer has not 'tolerated' any act of the employee but has permitted a sudden
exit upon being compensated by the employee in this regard.
Hence, notice pay, in lieu of sudden termination, does not give rise
to the rendition of service either by the employer or the employee.
As for the
department the Court noted that department was wrong in contending that the
employer has tolerated the act of immediate quitting from service by the
employees and such agreement/toleration results in rendition of a taxable
9. A similar view
was taken by the division bench of Allahabad Tribunal in HCL
Learning LimitedCaseM/s. HCL Learning Limited v. Commissioner
of Central Goods & Service Tax, Noida, CESTAT Allahabad,
the tribunal noted that notice pay recoveries are out of
salaries already paid by employer and, hence, service tax should not be charged
on such recoveries. The tribunal was of the view that the employment
agreement between the taxpayer and employee clearly states that employee shall
be paid salary and if employee leaves the job before the term is over then certain
amount already paid as salary will be recovered from employee. Hence,
such recoveries are out of salary and service tax should not be
charged on such recoveries.
Though the above cases belong to the old regime of
service tax, they reasoning holds good in the GST regime as well. The
government should come out with a clarification to deal with such matter under
the Goods & Services Tax (GST) regime.
Conclusion: Based on the
above discussion, view can be taken that the essential element to make a
transaction taxable is missing and hence the transaction of notice pay recovery
cannot be considered as supply. Employee is only making payment for the breach
of one of the conditions of employment agreement. In our view, GST shall not be
applicable on Notice Pay Recovery after the amendment of Section 7 i.e. scope
Despite this, the Tax Authorities may
contend to levy GST on Notice Pay Recovery. However, a clear perusal of the
sections indicate that GST must not be levied upon the same, and hence, a clear
clarification to this effect is essential in employer-employee relationships in
the present era.
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