The Authority for Advance Ruling (AAR), Gujarat has held that Goods and Services Tax (GST) is not applicable to the employer on the salary deductions made in lieu of incomplete or unfulfilled notice periods by their employees.
The ruling came in response to the application filed by M/s. Tata AutoComp Systems Ltd, a prominent automotive parts manufacturer seeking clarity on the GST implications of deducting a nominal amount from employees’ salaries in lieu of notice periods not served as per their employment contracts.
The applicant, represented by Suyash Maheshwari, Vikash Agarwal and Manish Kumar Mishra stated that the deductions were in accordance with the employment contract between the applicant company and its employees and were intended to discourage employees from serving shorter notice periods.
The applicant contended that they are not liable to pay GST on notice pay since, on account of the employment contract, they have a right to deduct an amount from the full and final settlement in lieu of the notice pay, enabling the employee to exit the company early serving a lesser notice period.
The applicant argued that in terms of Section 7 read with Section 2(31) of the CGST Act, 2017, there has to be a co-existence of “activity” & “consideration” and the reciprocal relationship between these two is necessary to treat an event as a supply.
The applicant relied on the rulings of Emcure Pharmaceuticals Ltd, GE T&D India Ltd, M/s. HCL Ltd, State Street Syntel Services P Ltd, Shriram Pistons & Rings Ltd, Samsung India Electronic P Ltd, Cognizant Technologies P Ltd and CA (India) Technologies P Ltd.
The Authority comprising Milind Kavatkar, State Goods and Services Tax (SGST) Member and Amit Kumar Mishra, Central Goods and Services Tax (CGST) Member clarified that the deduction did not satisfy the criteria of “activity” and “consideration” necessary to qualify as a supply under the Central Goods and Services Tax (CGST) Act, 2017 and hence the deductions are not subject to GST. They shall be deemed non-taxable.
The AAR ruled that this amount is not subject to GST. The deduction is made as per the employment contract and it is treated as damages for the breach of the employment agreement. Therefore, the AAR concluded that it does not constitute consideration and, hence, is not liable for GST.
This AAR ruling clarified that employers are not liable to pay GST on the salary deductions made in cases of incomplete or unfulfilled notice periods served by the employees.
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