Partner - Risk Management
Training Operations - Csr
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Raj Kumar Hansdah
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25th May 2013 From India, Hyderabad
How U got this idea to apply ST from an (ex-employee), funny though. There is no notification of ST with regard to salary payment. You don't extend any service, do U mean to say recovery/paying the Notice Pay to the (ex)-employee a Service ? Good idea, send this suggestion to Mr.P.C. I'm sure he would reward you for such a suggestion which would fetch the exchequer 12.36% on every body's salary as this would amount to a single largest contributor to the govt's kitty. (don't get offended, just for fun).
27th May 2013 From India, Bangalore
We, HR group, are using this forum for knowledge sharing / message gathering. If anyone Ďpostí anything in this forum means, there is some information required and expecting help from knowledgeable persons and I hope no one is playing Ďfunny gamesí here (Loginmiraclelogistics please note and donít comment unnecessarily in the ďpublic forumĒ if you donít know anything & donít be act smart)
Additionally would like to inform you that in July 2012, there was some amendment in Service Tax rules and come to know that ďsome employersĒ started deduct service tax @ 12.36% on notice pay period payment (shortfall of notice period) from the resigned employee. The reason behind is, when employee submitted his resignation, the service agreement between both of them (employee and employer) has come to an end and employer is giving service to resigned employee for the remaining notice period. However, some dilemma in the service tax amendment and hence not followed by all the employers (employers are justifying with their own interpretation).
In case, any of you come across this situation or having the service tax amendment copy, please share, which may be useful to other members.
27th May 2013 From India, Mumbai
I do not know who is this employer who has been deducting service tax on notice pay recovery. However, in spite of doing so much work in service tax, I have not heard such a thing before. Whoever has taken this interpretation obviously has no knowledge of service tax. He should refer to his CA for help.
The only case where service tax is applicable in reference to employee services is for SERVICES RENDERED TO EMPLOYEES, which covers amounts deducted for Canteen services, club facilities and the like.
There is no service tax on any payment made by employer to employee or for deductions made therefrom except where it is to pay for services that are already in the list of services covered in service tax. (Eg food / catering services is covered under service tax, so deduction from salary for catering services in factories requires payment of service tax on the same to be paid).
In fact I find loginmericaklogistics comment appropriate in this context.
27th May 2013 From India, Mumbai
While I am sure Loginmiraclelogistics NEVER had any intention of poking fun @ you OR the topic you raised, pl also try to take humour in your stride.
Can you pl post the relevant portion of the Rules that you referred to ['............inform you that in July 2012, there was some amendment in Service Tax rules..']? This will enable the members to get clearly as to what you are referring to.
Prima facie, like Saswatabanerjee mentioned, this doesn't make any logical sense. But knowing how our Governments operate, there's always a chance of such things getting into Policies.
Another possibility COULD be that the Rules MAY be saying something & the Companies MAY be INTERPRETING in the wrong way [happens quite often].
I don't quite understand what you mentioned--".......when employee submitted his resignation, the service agreement between both of them (employee and employer) has come to an end and employer is giving service to resigned employee for the remaining notice period......".
I find 2 points that need elaboration by the legal members:
1] The Agreement you are referring to is an Employment & NOT Service Agreement.
2] The Resignation letter is ONLY an Expression of Intent of ending the Agreement. The Actual End comes once the Relieving letter is issued.
14th August 2013 From India, Hyderabad
I also second my friends' requests to you to share the relevant sections to your reference "['............inform you that in July 2012, there was some amendment in Service Tax rules..']
With regard to Loginmiraclelogistics remarks; I personally found your comments rather unnecessary, abrasive and quite offensive. Even in highly serious board rooms, there is room for humor. I tried looking up the rules on CiteHR and couldn't find a rule that debars any of us from smiling when on this forum.
15th August 2013 From India, Mumbai
Thanks for these rejoinders from all of you.
It appears there has been misconception in understanding the concept of ST as the provisions of taxation on services becomes more and more complex and seen as a domain having potential area for filling up the coffers of the exchequer. As a person practicing in ST matters and also HR functions I only can view that some unscrupulous employers trying to unnecessarily recover non-existent tax from the helpless employees. This is evident from the queries raised by some of our friends. First of all one should understand that a relationship exists between an "Employer" and his "Employee" does not come under the ambit of "Services" either during employment or anything related to such employment "thereafter". A settlement accrued & due and settled subsequent to relinquishing the employment can never come under the "services" warranting recovery of ST from such (ex)employee. Some extra cautious administrators & accountants could have inflicted such avoidable arguments and recovery. This has to be negatived by the concerned at any cost in order to stop continuance of such wrongful recoveries.
In order to provide some tips to the needy I attach a notes of ST, negative list etc. for their ready reference.
Of course, there are innumerable notifications issued on ST and settled cases which only could clarify certain specific issues, those are available in the respective websites.
15th August 2013 From India, Bangalore
#AnonymousNotice period shortfall is treated as a short of service and will have to be completed by someone else whom we would pay a fee. this fee attracts service tax. since the service tax follows the list of exclusions. this is my interpretation.
23rd August 2013 From India, Mumbai
26th August 2013 From India, Mumbai
The link to view the clause (e) of Section 66E Declare Services in Service Tax Law
One more thing apart from Service Tax Law that one of High Court give Judgement that BOUND AN EMPLYOEE UNDER BOND is unconstitutional and invalid. So any employee who face the situation may file writ.
8th October 2015 From India, Bangalore
As per amendments in Service Tax rules from time to time, now the service Tax is applicable on all the services except the services mentioned under Negative List of services provided. Hence the notice pay may get covered under Service TAx Rules as Companies collect money from the resigning employees for tolerating early termination from the employment, without serving notice period and such receipts could be liable to service tax in the hands of company, at the limb ‚Äď ‚Ä¶‚Ä¶‚Ä¶‚Ä¶..to tolerate an act or a situation and service tax could be demanded.
Please go through the following.
Services in course of employment
Under the negative list based taxation, all the services covered under the definition of service wef July 2012 shall be taxable, except the services listed in Negative list or services exempted vide mega exemption notification.
As per Section 65B (44), definition of service reads as under:
‚ÄúService‚ÄĚ means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include;
a provision of service by an employee to the employer in the course of or in relation to his employment;
In other words, the service provided by employee to employer in course of employment is excluded from service tax levy.
Service tax implication on short notice recovery
Now it is clear that, there is no exclusion or exemption to the services provided by employer to employee. The same is also not covered in the exclusion limb of the service definition either and covers declared services in the definition of service, and declared services, as per section 66E (e) sets out as under:
‚Äėagreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act‚Äô
Companies collect money from the resigning employees for tolerating early termination from the employment, without serving notice period and such receipts could be liable to service tax in the hands of company, at the limb ‚Äď ‚Ä¶‚Ä¶‚Ä¶‚Ä¶..to tolerate an act or a situation and service tax could be demanded.
At same time, it should not be lost sight that under negative list based taxation, the Service tax levy is an activity tax. Service tax is leviable on service being ‚Äėany activity‚Äô for a consideration. Though the company is receiving a consideration, there is no activity done by company to the employee in exchange for consideration of notice period recovery. A view is possible that the fundamental premise of ‚Äėactivity for a consideration‚Äô itself is not satisfied, in which case the Service tax levy may not be applicable.
Even though it is not liable, as of date there is no clarification/circular clarifying non applicability of service tax on notice period recovery, erring on caution the service tax could be decided to be paid by the company as under.
Whether service tax can be collected from the employee?
As per Section 68(1), service tax is payable by the provider of taxable services, except in some specified instances where the service receiver is liable. As service tax is destination based levy the service tax could also be collected from the service receiver and paid to Government by the service provider. This view was also held in All India Federation of Tax Practitioners & others v/s Union of India (2007 (7) S.T.R. 625 (S.C.))
An employer, who is recovering amount towards short notice, could collect and pay the service tax at 12.36% from the employee. As a tax planning, company could insert a clause in the employment agreement, stating that service tax payable extra by employee as applicable. If company does not collect service tax extra.
If company does not collect extra service tax, then it shall bear the service tax out of pocket by calculating the service tax on inclusive basis as per Sec 67(2) of the Act.
An illustration is provided below for the benefit of readers for clear understanding of the concept.
Mr. Vijay, a professional software programmer, employed in M/s ABC Software Pvt Ltd having an experience of 2 years, drawing a salary Rs.75,000 p.m. and wish to leave the company as he has got some better opportunity elsewhere. So he decides to leave M/s ABC and as per the terms of employment he shall serve notice period for a period of 3 months. Compute the amount of service tax payable by the company.
In the given case assuming that Mr. Vijay has served only one month of notice period and did not serve other two months and agreed to pay off his short notice.
No separate clause in the employment agreement, with respect to service tax and the company did not collect service tax from Mr. Vijay.
Amount received as short notice recovery for 2 months Rs.1,50,000 (Rs.75,000 * 2 months)
Service tax included in Rs.1,50,000 Rs.16,501 (Rs. 150,000*12.36/112.36)
Therefore in the current situation M/s ABC shall pay a service tax of Rs.16,501 from this receipt.
A separate clause in the employment agreement is inserted saying ‚Äėthat the amount recovered would be in addition to the applicable service tax‚Äô
Amount received as short notice recovery for 2 months Rs.1,50,000 (Rs.75,000 * 2 months)
Service tax on in Rs.1,50,000 Rs.18,540 (Rs. 150,000 * 12.36%)
Therefore in the current situation M/s ABC shall pay a service tax of Rs.18,540 from this receipt, which shall be collected from the Employee.
Though there is no activity of service, there is a flow of consideration from employee to employer and also at present there is no clarity in the law. Since, service tax law is new and developing with grey areas, erring on caution the recovery towards short notice could be levied to service tax and it is advisable to remit service tax by the employer either by collecting it from the employee or shall be paid by employer by calculating service tax on inclusive basis as illustrated above.
17th November 2015 From India, Aurangabad
"agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" can be extended there are innumerable instances to levy such ST on fines etc.. For example a fine levied on riding two wheeler without helmet on, without DL, not appearing in the court, not wearing a uniform in the schools and colleges, late coming to office and so on. Could someone say ST can be levied on 'refraining from an act ??" Where is the end ? If there available any settled cases we may have some clue on the subject to say what is right.
18th November 2015 From India, Bangalore
However, this is different from a service that is rendered by a Service-Provider.
Thus there is a distinction.
If a working maid works in a household, that means she is employed there.
Is there any provision for recovery of service tax from a household maid ????
9th January 2016 From India, Delhi
Company recovering Service Tax, should be registered under the Service Tax Rules so that charged Service tax could be deposited with the Govt.
It could not be understood how the notice period recovery is a service on which Service Tax is chargeable.?
There is limit of value of services above which service tax is applicable?
Payment of salary/wages or deduction there from (short notice period recovery can be termed as deductions) can not be termed as service liable to service tax. I understand that companies do not issue bill/invoice/notice while charging service tax to their resigning employees for recovery short notice period?
9th January 2016 From India, Panipat
It seems charging service tax from employees, is another instance of such small unscrupulous companies who indulge in activities such as bifurcating Minimum wages to save on PF, deny maternity leave to female employees, terminate services when an employee give notices, have unilateral notice period etc .
They are the ones who evade taxes, and when it comes to troubling departing employee, then devise illegal means to harass them further. The best way to deal with them is to file criminal cases for cheating. Without a clear order or notification from the government, how can they Levy anything from employees, on behalf of the Government ??
Deduction from some payout is something, and Recovery is entirely different thing.
10th January 2016 From India, Delhi
10th January 2016 From India, Bangalore