Is GST applicable for skipping notice period?

The Gujarat Authority for Advance Rulings (GAAR) has held that an
employee exiting a company without completing their notice period would
be liable to pay 18 percent goods and services tax (GST) on the recovery
of the pay.

This was in a case pertaining to an Ahmedabad-based export company
Amneal Pharmaceuticals that sought advance ruling on the issue of exit
from their job without serving the three-month notice period.

However, industry experts have said that while this shows that notice
pay is ‘not GST exempt’, the payment of this tax would differ based on
the employment terms and interpretations by the tax authorities.
MS Mani, Senior Director, Deloitte India told Moneycontrol explained
that on which transaction goods and services tax is applicable cannot be
certified in the GST law because there are far too many transactions all
over a country. GST law provides general guidance.
“Advance Ruling authorities interpret that law in a specific situation.
In this case, they have interpreted it to say that since serving the
notice period was a service, the notice pay of the employee should be
attracting GST,” Mani added.

What is to be noted is that this was a ruling in a specific case and may
not the same for all incidents where a corporate employee misses out on
serving the notice period.

So even while GST is applicable, depending on the employment contract
and terms set by individual companies, a decision will be taken.
Delhi-based HR consultant Nishant Tiwari who works with companies on
developing employment contracts said that it is ideal for employees and
employers to sit across and discuss all matters including GST.
“If GST is applicable, then the employee must be informed in advance of
the consequences of not serving the notice period. At the end, if the
employer is bearing the 18 percent GST, it will be recovered from the
employee,” he added.

For example, if the notice period pay is Rs 2 lakh, then the 18 percent
GST would mean an additional burden of Rs 36,000. This would be
recovered from the employee when they skip the notice period since it
amounts to a person promising ‘a service’ and not offering it.
So employees must be doubly-sure about the payment terms and sign the
offer letter only after careful verification. This will help avoid
penalty payments on account of GST.

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