Introduction
Employers often arrange for various facilities such as transportation, canteen, healthcare, insurance, for their employees. Such facilities are usually procured by the employer from third party vendors on payment of tax and made available for use by the employees. These facilities which are supposed to be utilized by the employee during the course or furtherance of employment are provided mainly free of charge, but in some cases, employer recovers a very nominal amount from his employees towards the said facility.
Issues
The above model adopted by employers nationwide, has been questioned time and again by the department on the aspects of taxability of cost recoveries made by the employer from the employees for providing the said facilities. The issues raised in this regard are:
- Whether the said facilities arranged by the employer for its employees amount to supply of services?
- Whether GST is applicable on the nominal amounts recovered by employer from the employees towards the availment of said facilities?
Controversy: Service Tax regime
The above-stated issues are not new to the GST regime, rather the said issues had been raised before various courts time and again in the erstwhile service tax regime, wherein, a view prevailed that if any recovery is made by the employer from employees for provision of services to the employees, the same will be covered under the definition of service and it will be leviable to service tax. In this regard a draft Circular vide F. No. 354/127/2012, dated 27 July 2012 clarified that where the services are provided against a portion of the salary foregone by the employee, such activities will be considered as having been made for a consideration and thus will be liable to tax.
However, in 2017 the Telangana High Court in case of Bhimas Hotel Pvt. Ltd. v. Union of India [2007 (4) TMI 860] held that provision of food at subsidized prices to the employees of the company would not be subjected to service tax. The Court decided the said issue without examining whether the same qualifies as service or not, but merely on the ground that same has already been subjected to VAT.
The issue saw new dimension in yet another order issued by CESTAT, Hyderabad in Ultratech Cement Ltd. v. Commissioner [2019 (9) TMI 888], wherein a passing reference was made by the Tribunal while deciding the issue of ITC to the extent of recoveries made. The Tribunal noted that to the extent the amounts are recovered from employees, they do not remain in employer-employee relationship, rather the parties enter into a relationship of service provider and a service recipient. Hence, the appellant was held liable to pay service tax on the services rendered to their employees.
It is therefore evident that the issue of taxability of recoveries has been controversial. But, under GST regime where all such levies are clubbed into one, the said issue was expected to be clear.
Controversy: GST regime
The CBIC, mindful of the fact that the same issues might arise under GST regime, have tried to resolve the issue by issuing a Press Release dated 10 July 2017 right after the commencement of the GST regime. The press release inter alia clarified that:
“The services by an employee to the employer in the course of or in relation to his employment are outside the scope of GST. It follows therefrom that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST.”
It may be noted from the above excerpt of the press release, that the Board has relied upon Entry 1 of Schedule III which provides that ‘Services by an employee to the employer in the course of or in relation to his employment’ shall not be treated as supply..
Instead of providing clarity on the issue, the Board has rather complicated the issue. The Board has not considered that the said transaction – between employer and employee - may amount to supply of services between related persons as employer and employee are treated as related person under GST law and by virtue of Entry 2 of Schedule I, the transactions between related persons made in the course or furtherance of business are treated as taxable supplies, even if made without consideration.
In light of the ambiguity created by the said press release, various applicants in different States have sought rulings from Advance Ruling Authority to get an authoritative ruling. However, with different rulings from different States has created more confusion. Hence, till the time the matter is fully resolved by the HC / Supreme Court, the taxpayers are in an unenviable position.
Recent Advance Rulings
The two recent AARs, one issued to Tata Motors Limited [2020 VIL 257 AAR] by AAR Maharashtra dated 25 August 2020 and another issued to Beumer India Private Limited [2020 VIL 316 AAR] by AAR-Haryana dated 29 October 2020, are noteworthy at this juncture as both these AARs are latest in time and have taken opposite views.
In Tata Motors, the applicant / employer had engaged a service provider to provide transportation facilities for its employees and the company was recovering a nominal amount from employees for availing such facility. The advance ruling was sought on the aspects of availability of ITC of tax paid to service provider and taxability of nominal amounts recovered from employees for said facilities. The AAR, with regard to the taxability of recoveries, ruled that the transaction between the applicant and their employees, having ‘Employer-Employee’ relation, is not a supply under CGST Act by virtue of Entry 1 of Schedule III. Hence, when applicant is not supplying any services to its employees, GST would not be applicable on the nominal amounts recovered by applicants from their employees.
In Beumer India also, similar facts were involved, wherein the applicant / employer engaged a transport agency under a contract, to provide buses for transportation of employees of the company to and from the workplace. The company provided such facilities to its employees as part of its human resource policy free of cost but recovered a nominal amount in case of air conditioning facility. The advance ruling was sought on the aspects of taxability of such facility provided by the employer to the employee with or without recovery of cost from employees.
The AAR Haryana at the outset rejected the contention of applicant that transportation facility provided by the employer to employee are not taxable by virtue of Entry 1 of Schedule III, on the ground that the said entry covers transactions between employee and employer and not the other way around. Observing that the transportation service/facility in the instant case was the service provided by the employer and not by the employee, at the same time, it is in the furtherance of his business, the AAR held the service as not covered under Schedule III.
It is pertinent to note that the view taken by AAR Haryana conforms to the ruling issued in the matter of Caltech Polymers Private Limited [2018 (12) G.S.T.L. 350 (A.A.R. - GST)] which has been affirmed by the Appellate Authority for Advance Ruling [2018 (18) G.S.T.L. 373 (App. A.A.R. - GST)], wherein it was held that recovery of amount from employees for the canteen services provided by the company would be considered as outward supply and GST will be applicable on the same.
It may however be noted that above rulings in Beumer India and Caltech Polymers matters are contrary to the ruling in Tata Motors matter and the Press Release dated 10 July 2017, wherein it was clarified by CBIC that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST.
The liability for payment of tax on provision of facilities to employees may arise when perquisites are outside the scope of employment agreement. The terms of contract or employment therefore plays a crucial role in determining the taxability of perquisites in the hands of the employer.
Conclusion
In view of the divergent rulings on this issue, employers providing certain facilities or perquisites (such as transportation, canteen, insurance, healthcare, etc.) to their employees are advised to review the terms of employment with its employees. The companies are also advised to revisit the stand taken by them on the GST implication on partial recovery of money towards provision of various facilities to their employees.
[The authors are Joint Partner and Associate, respectively, in GST Advisory practice at Lakshmikumaran & Sridharan Attorneys, Bengaluru]
