Very often, we believe the employer-employee relationship to be beyond the purview of indirect tax. The company, we figure, is only a juridical person and operates through the acts of its employees.
A close look at Model GST Law (MGL) suggest that law makers have addressed several issues under existing laws with respect to which ambiguity prevailed, resulting in litigation requiring judiciary to intervene.
One such provision which has been penned differently in MGL deals with services by employee to the employer. It will be quite interesting to analyse the same in the light of existing provisions to understand some of the major changes that it envisages to bring in, going forward.
So, the employee and the company should not be treated as different persons to charge tax on every transaction between them. But some of the entries in the GST law tend to defy this logic.
Schedule 3 of the Central GST (CGST) Act 2017 deals with activities or transactions that shall not be treated as supply. One entry specifies “services provided by an employee to the employer in the course of or in relation to his employment”.
So, the consideration paid by an employer to the employee — i.e., salary paid for rendering services in the course of employment — would not be taxable under GST.
The GST law complicates the employer-employee relationship further by way of Entry 2 in Schedule 1 of the CGST Act, “Supply of goods/services made without a consideration between related persons, when made in the course or furtherance of business, would be taxable.”
Another twist in the tale is that the proviso to Entry 2 in Schedule 2 excludes from the definition of ‘supply’ gifts up to Rs 50,000 provided to an employee in a financial year. Hence, gifts above Rs 50,000 would be liable to GST and a company would be required to keep a record of gifts provided to each employee.
HR policies and CTC structures can be simplified to meet the GST simplification.