The Karnataka Authority of Advance Ruling (ARR), ruled that the reimbursement of expenses at actual cost which are incurred by the employees on behalf of the company is non taxable under Goods and Services Tax Act, 2017 since it comes under the ambit of Schedule III of Central Goods and Services Tax Act.
The concern of whether Reverse Charge Mechanism (RCM) is applicable on reimbursement of expenses paid on behalf of the Company at actuals which are incurred by the employee staff who is a whole-time director Company is addressed by Yaadvi Solutions Pvt. Ltd., the applicant company.
By using a Reverse Charge Mechanism, the recipient of the goods or services is responsible for paying the Goods and Services Tax (GST) instead of suppliers. The RCM is not applicable when such charges fall under Schedule III of the Central Goods and Services Tax Act, according to the observations made by the bench.
The bench, with the furnished details provided by the applicant and with the support of Circular No. 140/10/2020 of Central Tax (Rate), clarified the term ‘expenses paid’ under the head ‘Salary’ and other than ‘salary’.
According to the bench, “expenses paid” as informed by the applicant, if it comes under the definition of “Salary” then it is not a taxable service and if it comes under “other than the Salary” then as per Circular No 13/2017- Central Tax (Rate) dated 28.06.2017, the company is liable to discharge the applicable Goods and Services Tax on it on reverse charge basis.
According to the authority members, the reimbursement of expenses does not forms part of Salaries or perquisites and is not subject to TDS under section 194J of the Income Tax Act,1961, and that all the activities performed by the director are in the course of employer-employee relation (i.e. a “contract of service”). Further, reverse charge is not applicable on said transaction.
As a result, the bench determined that RCM is not applicable to the expenses paid by the whole-time director on behalf of the company who is also an employee of the company and falls under the purview of Schedule III of the Goods and Services Tax Act with the aid of the circulars and an understanding of the expression “expenses paid” on different heads.
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