The Goods and Services Tax (GST), the biggest economic reform, has been implemented in India since 01 July 2017. Every new thing comes out with fresh challenges, similar is the case with GST. With the passage of GST in India, there seem to be humongous challenges revolving around Gift and Perquisites provided by an Employer to their Employees.
In terms of GST Laws, CGST and SGST or IGST shall be levied on supply of goods or services or both. Further, the supply includes activities as specified in Schedule I to GST Act even if made without consideration. Accordingly, tax will be levied on all such activities.
Entry 2 of Schedule I states
"Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business"
"Provided thatgifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both".
Further, as per Section 15 of the GST Laws, employer and employee are considered as "related parties". On reading of the said entry, we understand that gifts provided by an employer to employee exceeding fifty thousand rupees are leviable to tax. However, the term "Gift" has not been defined under the GST Laws. Accordingly, the term gift is open for interpretation.
In common parlance, gift made without consideration, is voluntary in nature and is made occasionally. It cannot be demanded as a matter of right by the employee. The employee cannot move a court of law for obtaining a gift.
It is pertinent to note here that the services by an employee to an employer in the course of or in relation to his employment are outside the ambit of GST (neither supply of goods or supply of services). It follows therefrom that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST.
Having said that, there is much ambiguity around the taxability of facilities provided by employer to employee. Such facilities may include car on lease, mobile handset for official purpose, paid holidays, holiday homes, club memberships and chauffeur assistance. Companies often give gifts to employees – it can be a small one like a pen or an expensive one like an iPhone or gold coin of 20 grams. All such gifts come under GST.
A question may arise whether a particular item is a gift or a reward and whether a reward should attract GST or should be treated as a performance bonus in nature of salary? Company cars are one of the biggest perks senior executives get. Personal use of company cars can be treated as a service and would attract GST.
With regard to above complexities, Finally, the Government has come up with the press release dated 11 July 2017, wherein it has been specifically highlighted that any perquisites forming part of the employment agreement, i.e., included in the employee's cost-to-company ('ÇTC') shall not be considered as supply of gifts.
Accordingly, it is advisable that the Company shall include in its employment letter that all perquisites shall be provided as part of employment.
Further, It is imperative to note that the press release does not have any legal binding before any courts, unless such clarification is supported by way of circular/notification. However, one may place reliance on the same to understand the intent of law.
We have highlighted the implications on few transactions of gifts and perquisites by Employer to Employee:
Transaction 1 – Asset (Car and computer) on Lease to employees
♦ The Company procures the Asset and provides such asset on lease to its specific employees
♦ At the end of such tenure, the Asset on lease is transferred to such employee
♦ In view of the above, it is pertinent to note that such lease may qualify as finance lease and, therefore, be taxable under GST.
♦ However, in the press release dated 11 July 2017, the government has brought clarity, wherein it has been specifically highlighted that any perquisites forming part of the employment agreement, i.e, included in the employee's cost-to-company ('ÇTC') shall not be considered as supply of gifts.
♦ To support the above, the government has provided an example that "The same would hold true for free housing to the employees, when the same is provided in terms of the contract between the employer and employee and is part and parcel of the cost-to-company"
♦ Accordingly, It is concluded that where the entire arrangement forms part of the employer-employee arrangement, the same may not be termed as supply and, therefore, not leviable to tax under GST
Transaction 2 - Loan to employees at subsidized rates
♦ We understand that the Loan given to employees is part of the employment agreement.
♦ Accordingly, any interest recovered shall not form part of the supply as the said transactions is part of the employment agreement.
♦ If the loan is not given in pursuance of employment contract and the interest rate charged by employer to employee is less than the market rate, differential rate may be considered as gift and will be included in the computation of INR 50,000
Transaction 3 - Mobile Handset Reimbursements
♦ The Company reimburses the employees for procuring a smart phone for making official calls.
♦ We believe that such reimbursements shall not be considered as Supply under GST and therefore, no GST is required to be discharged on such transactions
However, if the company does not recover any amount at the time of his termination and mobile handset is not taken back from the employee such transaction would be treated as supply without consideration and, therefore, may be considered as a Gift
Transaction 4 – Other Reimbursements
♦ Hotel Expenses - Not Taxable since these are not considered as Gifts.
♦ Air travel services - Not Taxable since these are not considered as Gifts.
♦ Mobile Reimbursements - Not Taxable since these are not considered as Gifts.
Transaction 5 – Diwali Gift/Bonus
♦ The Companies give Diwali Gifts to their employees which are nowhere mentioned in the employment contract
♦ We believe that the such gifts shall be taxable if total amount of gift/bonus exceeds the threshold of INR 50,000.
There can be many more transactions in the nature of gifts and perquisites. It will be a big exercise to find out what qualifies as a gift or a perquisite or reward. The Companies will now have to keep an account of all gifts given to each employee and start paying taxes on some gifts.