GST Not Payable On Notice Pay Recovery From Outgoing Employee: Punjab AAR

The Punjab Authority of Advance Ruling (AAR) has held that the GST is not payable on notice pay recovered from outgoing employees.The member bench of Sunder Lal and Kumud Singh has observed that the amount received as notice pay recovery by the applicant from the employees who leave the applicant company without serving the mandatory notice period mentioned in the employment contract is not a consideration for any supply or service.The applicant is a multi-disciplinary consulting organisation that deals in the fields of transportation, infrastructure, and other related technologies. Whenever the applicant company hires an employee in the organisation, it enters into an employment contract with that employee. The employment agreement of employees states that if an employee of the company resigns from the organisation, then such an employee has to serve the mandatory minimum notice period as mentioned in the agreement.However, if the employee is unable to serve the stipulated notice period, then the employee's company recovers an amount as notice pay or deducts the amount from the employee's salary in lieu of the unserved notice period. in the nature of compensation for the breach of the terms of the employment agreement. The applicant has received charges for not serving the notice period.The applicant has sought an advance ruling on the issue of the applicability of GST on charges received by the company in cases where the employee is unable to serve the notice period as per the employment contract.The CBIC issued a circular dated August 3, 2022, clarifying that the charges paid by an employee when he or she leaves without serving the mandatory notice period cannot be understood as consideration for any supply or service.The AAR held that notice pay does not result in the provision of service by either party; it is sort of compensation to either the employee or the employer and not a consideration. It is a safety valve-type option for both parties, i.e., if one of the parties frustrates the employment contract either by reneging or by failing to perform. It is the employee who is the service provider, and services supplied by him in the course of his employment are excluded from the definition of supply under the GST Act.Applicant's Name: Rites LimitedDate: 18.10.2022Click Here to read Ruling

GST Not Payable On Notice Pay Recovery From Outgoing Employee: Punjab AAR

Mariya Paliwala

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