GST on Notice Pay Recovery

If you are thinking about switching jobs and ditching the notice period – this article is just for you! The Gujarat Authority of Advance Ruling has come up with the decision to charge 18% GST on notice pay recovery. This essentially means that if an employee fails to oblige to the notice period duration or even doesn’t comply for the whole period, they will have to pay 18% GST on notice pay recovery. Let’s break this down and understand the significance of GST when it comes to serving the notice period.

What is Notice Pay Recovery? 

When an employee leaves the company without serving the required notice period as per their terms of employment, the employee has to pay the employer an amount equal to the unserved notice period.  This is called notice pay recovery. 

When an employee decides to leave an organisation, the company needs to look for its replacement or offload work so that there is no impact on production. Now if the employee decides to leave without serving the notice period, the company suffers a loss. In order to recover from this, the employee is required to pay the amount for whatever duration they did not oblige to the notice period. 

Applicability of GST on Employment Terms 

You might find yourself wondering, where does GST come in the picture between an employee and employer’s terms of employment. There was a lot of debate around the applicability of GST on notice pay recovery until now. So let’s break it down and understand how is GST applicable to employment services. 

Under the CGST Act, all supply of goods and services are subject to GST. Schedule I of the CGST Act includes transactions that are treated as supplies if they are made without consideration between two related parties but contributes to the business. Further, Section 15 of the CGST act includes employer and employee as related parties. That makes it pretty simple, right? Supplies made from an employer to an employee will attract GST. (excluding gifts up to Rs 50,000)

But wait, we did not mention Schedule III of the CGST Act which includes activities that can neither be treated as supply of services nor supply of goods. And yes, the act states that services by an employee to an employer do not fall under either supply of services or supply of goods. 

So from this, we understand that employee compensation is not subject to the goods and services tax. 

How Does GST Apply on Notice Pay Recovery?

So far, we have looked at different aspects of GST applicability when it comes to the employee-employer relationship. From the above-discussed points, we have established that employee remuneration does not attract GST. So how was the rule of 18% GST on notice pay recovery passed? 

Coming to Schedule II of the CGST Act, this act includes all the activities that will be treated as a supply of goods or services. One of these activities includes ‘Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation’.

So, when an employee joins or leaves an organisation, they are bound to certain terms of employment which also include serving the notice period which can be from 15 days to 3 months, depending on the role and the organisation. The act of refraining from serving the notice period can be concluded as tolerating an act by the employer which attracts GST according to Section II of the CGST Act. 

According to the Gujarat Authority of Advance Ruling, if an employee refrains to serve the notice period, they have to pay 18% GST along with paying the salary amounting to unserved notice period to the company.