Those who leave the job without giving proper notice beware. In doing so, the company may charge you a slightly higher amount as ‘Notice Pay Recovery’. Why so? Because the Authority of Advance Ruling (AAR) on Goods and Services Tax (GST) has ruled that any recovery made by the employer will be treated as ‘supply of services and will attract GST.
Not only salary but also the premium of group insurance provided by the company, phone, or other facilities will also come under the purview of pay recovery.
Not only this, if the company has spent a huge amount on special training or higher studies of the employee and that amount is also to be recovered under the contract, then GST can also be charged on that recovery. Tax experts say that if this decision of AAR is implemented, then the additional burden on the companies will increase, and eventually it will be recovered from the pocket of the employee.
Generally, the GST rate on services is 18%. Understand this broadly, if the company has to recover a pay of Rs 1 lakh from an employee, then after the introduction of GST, he will pay Rs 1 lakh 18 thousand.
What is the meaning of AAR and Verdict?
The Authority of Advance Ruling was set up to resolve any difference of opinion on the provisions and rates of GST. Where there is no clarity in the GST law, the decision of this authority is valid. However, its decision can also be challenged in court.
You know that GST is levied on the supply of goods and services. Generally, financial transactions (such as salary, incentives, bonus, etc.) between the employer and the employee are not considered as ‘services’ and are not subject to GST. But the ruling authority, which has been the subject of controversy for a long time, has considered ‘pay recovery’ as service taxable.
What do GST experts say?
Ved Jain, former President of the Institute of Chartered Accountants of India (ICAI) and GST expert, told ‘The Lallantop’.
“All types of pay recovery will come under the purview of this decision. If the employer has taken a group insurance policy for his employees and collects a part of the premium from the employee or has provided the phone and other conveniences at affordable rates, then that employer as a GST dealer will be able to cover his employees as per this rule. Providing services. In such a situation, the liability of GST on recovery is made. This will increase the cost of companies and they will also put this additional burden on the employees.
How much will GST cost?
Till now, there is no clear mention of pay recovery in the rate list of GST law. Talking about the rates, there are broadly four rates of GST – 5 percent, 12 percent, 18 percent and 28 percent. With the implementation of GST, service tax was subsumed in it and now most services attract 18 percent GST. In such a situation, it is believed that only 18 percent GST will be levied on the recovery of notice.
We also spoke to GST Consultant CA Rakesh Gupta on this issue. He told ‘The Lallantop’,
“This decision is important because in general the relationship between employer and employee is not covered under GST, i.e. payment or services received by the company to the employee are not considered as service from the GST perspective. Controversy had emerged recently regarding notice recovery. If the GST department wants compliance on the basis of this decision, then its financial impact can also be big. But I believe that the controversy on this issue is going to persist.
Training recovery will be heavy
This decision becomes more important in view of the competition for talent grabbing in companies. Rakesh Gupta said that if GST is charged considering notice pay recovery as a ‘service’, then many more facilities will come under its purview. They said,
‘One of my clients has recently left a multinational company. The company had sent him abroad for higher studies. But in the middle, he got a better job. As per the contract, the company sought recovery of Rs 12 lakh from him. That employee paid this amount with the help of the new company. If we consider 18% rate applied here, then that employee would have to pay an additional amount of about 2 lakh 16 thousand rupees as GST on recovery.
What is a recovery on notice?
When a person joins a company or organization as an employee, he has to sign an agreement on certain terms and conditions. Under this, the company has to be informed to leave the job before the stipulated time. This notice period can range from one month to three months. If the employee does not do so, an amount equal to the salary of that period is payable to the company.
This amount is generally deducted from the salary or other dues by the companies or the employees deposit it from their side. This is called recovery on notice. The trend of recovery has increased in the competition of talent hunt among the companies and many times the hiring company pays the old employer of the employee from them.