Employee Reimbursement – Applicability of GST ?

30^th June, 2017

Employee Reimbursement – Applicability of GST ?

Dear Readers,

Goods and Services Tax (GST) will be applicable on supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, with effect from 1st of July, 2017.

Section 7 of the CGST Act, 2017 defines the word “supply”, which includes and excludes certain activities or transactions under its ambit.  Thus, if the word supply includes certain activities or transactions the same are subject to GST and vice versa.

Section 7, inter alia includes the activities specified in Schedule I, made or agreed to be made without a consideration.  Schedule I inter alia includes supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business, with an exception that, gifts not exceeding Rs.50,000/- in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.  Employer and employee shall be deemed to be “related persons” as per the Explanation (a) to sub-section (2) of section 15 of the CGST Act.  Thus, any goods or services supplied by the employer to his employee or vice versa, without consideration, shall attract GST.

The word “consideration” in relation to supply of goods or services or both, is defined in sub-section (31) of section 2, which inter alia includes any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person.

Section 7, inter alia excludes activities or transactions specified in Schedule III.  Schedule III specifies activities or transactions which shall be treated neither as a supply of goods nor a supply of services.  Thus, the activities or transactions specified in Schedule III shall be out of ambit of GST.

Entry no.1 of Schedule III specifies that, services by an employee to the employer in the course of or in relation to his employment.

According to this entry, any services provided by the employee to his employer which is as per the terms of his employment shall not be subject to GST.  Thus, services provided by an employee for which salary is paid (either in cash or in kind) by the employer, in the form of consideration, is not subject to tax under GST regime. 

In an employment contract, the employee apart from his cash emoluments is provided with perquisites, like motor car for personal and official use or a common transport facility, reimbursement of telephone line at residence or mobile or internet, use of company laptop, medical reimbursement, free or subsidised lunch, which also forms part of his salary package or Cost to Company (CTC) as commonly known. 

The moot question is whether these are the services provided by the employer to the employee without consideration and covered under Schedule I and therefore attracts GST?

OR

Whether this is a consideration received from the employer in the form of perquisites forming part of salary (refer section 17(1)(iv) read with section 17(2) of the Income Tax Act, 1961) and covered under Schedule III and therefore does not attract GST?

Let’s take an example of Mobile reimbursement.  Here the actual services are provided by M/s X, or Y or Z mobile service provider to the employee.  Here the mobile company does not act on behalf of the employer to be his pure agent.  It will therefore levy GST to the employee as a B to C transaction.  The use of mobile phone is incidental to the provision of service by the employee to his employer.  The employer reimburses the employee for the mobile bill paid by him.  In this case, claim of reimbursement for mobile is not a service in itself but is incidental to the provision of main employment service by the employee to his employer. Also here the employer does not provide the mobile services to his employees, but only reimburses the claims of the employees, for which they have received the services from the third party service provider, and have used those services to provide services to their employers.

Section 15(2) inter alia includes incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services, in the term value of supply.

Although Schedule III is out of the ambit of the term “supply”, in my view, reimbursement of mobile or telephone or internet bills is squarely covered under the term incidental expenses charged by the supplier of service (employee) to the recipient of service (employer).

Let’s take another example where the company policy states that if an employee works late beyond 10 pm, he can claim taxi fare reimbursement to his home or he can eat out and claim dinner reimbursement.  Even these reimbursements also form part of value of supply definition cited above, i.e. any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services (employment service being a continuous service).

To conclude, in my view, the above reimbursements are consideration received by the employee (in the form of perquisites and forming part of his salary) for rendering his services to his employer and not to be considered as services provided by the employer to his employee without consideration.

Whether the employer is required to pay tax as reverse charge under section 9(4) or section 5(4) of the CGST Act, or IGST Act, respectively?

The reimbursement of expenses if considered to be covered by entry no.1 of Schedule III of CGST Act, 2017, the same is not a supply itself.  Accordingly, registration requirement is waived off under section 23. Hence the employee is not an unregistered supplier of taxable goods or services and hence the employer is not required to pay tax under reverse charge under section 9(4) or section 5(4) of the CGST Act, or IGST Act, respectively.

Trust the above information is found useful to the readers. 

Your Views, comments, suggestions and improvements are most welcome.

Best Wishes,

Amol Mahajan