18% GST On Entire Salary: Switching Job Without Serving Notice Period

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Many industries including the Information & Technology are witnessing high attrition right now as companies are scouting for talent to work on new projects. Hiring companies are even buying notice period of the new employees in the rush to fill up vacancies. If you are among such employees and are quitting your present job without serving the required notice period mentioned in your offer letter, then be prepared to pay 18% GST on the entire notice pay(amount paid to your company for not serving the notice period).

As per a recent ruling in the case of Bharat Oman Refineries, which is a subsidiary of state-owned Bharat Petroleum, by the Central Board of Indirect Taxes and Customs’ Authority of Advance Ruling (AAR), GST will be applicable on different employees’ recoveries. These include telephone bills paid by companies, group insurance of the company employees, and payment of salaries in lieu of the notice period, The Economic Times mentioned in a report.

According to the above ruling, in the case of notice pay, the company is actually “providing a service” to an employee and hence GST should be applied on that. Under the GST framework, tax is levied on any activity that is viewed as supply of service-whether directly or deemed supply.

Speaking on the above ruling, Mumbai-based tax and investment expert Balwant Jain said, “When an employee agrees to pay his employer for not serving notice period, it is considered as a service and he is liable to pay 18% GST on the amount paid to his company. As employees are not registered GST payers, it is responsibility of the employer to pay GST through reverse charge mechanism on the recoveries from the employee.”

However, some of the tax experts are of the opinion that the AAR ruling does not portray the correct position of law. “In the absence of any positive act on part of the employer by allowing exit to employees during the notice period, the element of supply is grossly missing. Resultantly, such a transaction completely falls outside the ambit of GST,” said CA Geetika Shrivastava, Executive Partner, Tattvam Advisors.

CA Tushar Aggarwal, Founder Partner, Tattvam Advisors said their view is supported by the decision of Madras High Court in the case of M/s GE T&D in which it held that Section 66E(e) of the Finance Act, 1994, was not attracted as the employer has not ‘tolerated’ any act of the employee, but has only permitted a sudden exit upon being compensated by the employee in this regard. “However, the ratio of above decision has been disregarded by the Advance Ruling Authority for the reason that same relates to service tax regime and is not applicable under GST.”

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