Thus, when read inversely, it is understood that any kind of benefit – monetary, or in-kind like a gift – passed on by the employer to his employee, in addition to the contours of employment, is likely to be within the broad purview of ‘supply’ under GST.
But then drawing this fine line between what shall form a part of ‘remuneration for employment’ and what shall not, will certainly be a challenge for the employers.
The Contours Of Employment, And The Perquisite Beyond
As the maverick entrepreneur Richard Branson puts it very subtly, “clients do not come first. Employees come first. If you take care of your employees, your employees will take care of your clients” . Over the years, organisations have developed various ways of rewarding their employees. These include ways and means other than compensations in the form of salary or bonus – as perquisites. A few examples of such transactions are as follows:
- Supply of mobiles/laptops to employees.
- Provision of free of cost canteen services.
- Provision of free of cost transportation.
- Provision of gifts to employees on the occasion of festivals like Diwali, Christmas etc.
- Provision of cars (with or without a chauffeur) to employees and so on.
These perquisites, apart from the normal salary, are usually considered under the larger prism of remuneration, as they play an important role in employee motivation. However, the precise scope of
‘in relation to employment’
has not been defined under the CGST Act, 2017.
Thus ascertaining what shall form a part of ‘remuneration to employee’ and what shall not is likely to be left at the discretion of the employer.
In common understanding, anything up to the limit of Cost to Company’ (CTC) and a bonus is considered a part of the ‘remuneration to employee’ and the rest is considered as a perquisite. But, in the absence of a clear definition of ‘in relation to employment’ under GST legislation, one can never be certain about the interpretation of the law.
Gifting Small Relief To Employees
In the earlier versions of the GST legislation (November 2016), Schedule 1 consisted of matters to be treated as supply even if made without consideration; Clause 2 of Schedule 1 included ‘all the supplies made to related persons in the course of furtherance of business without any consideration’ .
Various representations were made to the government by those aggrieved by the clause to clarify, modify or delete it. The government partially tried to douse this fire by introducing a new proviso in the GST legislation which was tabled in the Lok Sabha. As per the amendment, a proviso has been added to Clause 2 of Schedule 1 which reads that
given by an employer to an employee during the course of a financial year under Rs 50,000 would not be considered as supplies without consideration. This may be viewed as a partial relief where small gifts made by employers to employees are outside the ambit of the clause.
But on reading between the lines, we understand that larger transactions – over and above the limit of Rs 50,000 – are very well within the ambit of this clause.
Further, from the drafting of this clause, the purpose of providing clarity regarding what the government is intending to tax under this clause seems to be more or less defeated. The term used in the proviso is ‘gifts’ made by employers to employees. However, the term ‘gift’ has not been defined anywhere.
An argument may be considered that this term could cover only ‘goods’ and not services. The term ‘gift’ has been defined under Transfer of Property Act, 1882 as ‘transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, to another’ . Accordingly, as per general understanding, ‘gift’ would only include moveable property ( i.e. goods ) and immovable property ( i.e. outside the purview of GST ), but would not include services.
Contrary to the general understanding of gifts, a ‘voucher’ , which is a popular medium of giving ‘gifts’ in the corporate world, can be construed either as goods or services or both, depending upon the case. Thus, until and unless the GST legislation directly defines the term ‘gift’, the confusion regarding ‘what shall be construed as a gift’ will prevail.
Challenge At Hand For Employers, And The Way Forward
Given the ambiguity surrounding the employee emoluments, assigning a perquisite value to employees could prove to be a major challenge for the employers. In order to tax gifts from employers to employees, the employers will have to ascertain what value shall be assigned to such gifts?
Currently, under Central Excise legislation, alternative mechanisms to arrive at a value for goods and services is prescribed. For instance, under the Central Excise legislation, there are specific valuation rules for goods sent as free samples or goods captively consumed within the factory of production. Similar valuation rules could also be proposed for valuing gifts to employees.
Furthermore, businesses would also face difficulties in developing, testing and putting in place a system to capture the employee related information that would be required for the purpose of assigning a precise value of perquisites for GST valuation.
Having considered this, employers may have to wait for either a clarification, issuing of rules, or a valuation mechanism to arrive at a value for such ‘gifts’. In the meanwhile, employers could initiate collating employee-related information in the background and start redefining the components of employee CTC to ensure the maximum amount of benefits given to the employee is provided under the aegis of a ‘remuneration in lieu of employment’, thus ensuring that they are tax-free.
Jigar Doshi is an indirect tax partner and Ravi Soni is an executive at SKP Business Consulting LLP. The views are personal in nature.
The views expressed here are those of the authors’ and do not necessarily represent the views of BloombergQuint or its editorial team.
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