Saswatabanerjee
Partner - Risk Management
Ashoknegidi
Training Operations - Csr
CaPulkit
Practicing Chartered Accountant
Jitendrasp
Tax Consultant
Tajsateesh
Recruitment/talent Acquisition, Career Counselling
Raj Kumar Hansdah
Shrm, Od, Hrd, Pms
Pon1965
Construction
Loginmiraclelogistics
Asso.prof.(commerce & Management) Pg
Executor
Start Up Consultant
+5 Others

Thread Started by #guru_home

Is notice pay recovery from a resigned employee liable for service tax? & also recovered from the resigned employee? If any one having notification / circular in this regard, please share.........
24th May 2013 From India, Mumbai
Notice Pay recovery is not a service tax related subject. Not applicable. Pon
24th May 2013 From India, Lucknow
Is there any specific notice in act or law ? pls update the same.
25th May 2013 From India, Hyderabad
Ashok
It is not in the service tax rules
(Note there is no service tax act)
So there is nothing to quote.
Notice pay is not a service, it is a part of salary (negative salary if you wish)
How can there be service tax on it ?

26th May 2013 From India, Mumbai
Dear friends,
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).
kumar.s.
27th May 2013 From India, Bangalore
Dear friends,

We, HR group, are using this forum for knowledge sharing / message gathering. If anyone post anything in this forum means, there is some information required and expecting help from knowledgeable persons and I hope no one is playing funny games here (Loginmiraclelogistics please note and dont comment unnecessarily in the public forum if you dont know anything & dont 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 some employers 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
Notice period salary is recoverd while the person is in employment and there is no service or contract and hence service tax is not applicable. The deduction is as per the terms and contract mentioned inthe offer letter and it has to be done as per that
27th May 2013 From India, Madras
Guru,
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
Hi, I have been charged with the service tax on my notice pay recovery. please let me know where can i appeal against this.
13th August 2013 From India, Noida
Hello Guru_home,
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.
Rgds,
TS
14th August 2013 From India, Hyderabad
Guru .. I completely agree with Tajsateesh and sawatabanerjee on their submissions.. an employment contract cannot come under service tax, even at the FnF level since there is no "service" rendered or accepted. Remember the overheads and HR costs you seem to be referred to are operational costs and not services ascribable to employment.
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
Dear friends,

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.

Thank U.
15th August 2013 From India, Bangalore

Attached Files
Membership is required for download. Create An Account First
File Type: docx Know about ST on Service Provider.docx (26.3 KB, 154 views)

Dear friends, For those who are in need of some more on ST matters,use the attached information. Regards,
15th August 2013 From India, Bangalore

Attached Files
Membership is required for download. Create An Account First
File Type: docx Notification No30 of 12.st.docx (15.5 KB, 78 views)
File Type: pdf NotificationDt.17.3.2012.pdf (144.6 KB, 85 views)
File Type: doc ST-Point of Taxation in Service Tax.doc (45.0 KB, 59 views)
File Type: docx List of services2012.docx (36.1 KB, 73 views)
File Type: docx Service Tax Notifications of Year 2012.docx (20.0 KB, 58 views)

Here are other notifications issued during 2013 as attached.
15th August 2013 From India, Bangalore

Attached Files
Membership is required for download. Create An Account First
File Type: doc Service Tax Notifications of Year 2013.doc (43.0 KB, 92 views)
File Type: docx ST.What we should know.docx (24.6 KB, 59 views)
File Type: doc Basic Understanding of Service.doc (163.5 KB, 153 views)
File Type: docx ST ON Works Contract-Some issues.docx (36.4 KB, 72 views)
File Type: doc ST.General Notes 2013.doc (292.5 KB, 66 views)

#Anonymous
Notice 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
Dear Anonymous - if an employee's work is completed by a contractor (a fee that attracts service tax) - it is a business decision YOU are taking and not the employee leaving. If it is completed by another employee, there is no service tax involved. Liabilities related to your business decisions are your's alone and can not be linked to the terminations of another contract. This, to me, is nothing but unethical ways to gain a few thousand rupees of positive cash flow through incredibly creative accounting.
26th August 2013 From India, Mumbai
Go to the link in above post. See the link in reply in that forum. Notification is attached.
8th February 2014 From India, Bangalore
The link has a note posted by someone saying that this is now liable to service tax but there is no notification attached to the discussion
8th February 2014 From India, Mumbai
If you read the reply in reply one link. Go to that linked discussion, you can see the attached document in blue color.
8th February 2014 From India, Bangalore
" As per section 66E(e) of Service tax - Declared service which is subject to service tax is - " agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act" Hence service tax would be attracted.
2nd April 2015 From India, Mumbai
The amount recovered on regisnation, penalty for breach of contract condition falling under clause (e) of section 66E of Finance Act 1994 and accordingly liable for service tax. The company may ask the Service Tax amount on bond value or treat it as inclusive of service tax.
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
Dear Friends,

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 – …………..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:
“Service” 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:
‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’
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 – …………..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 ‘any activity’ 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 ‘activity for a consideration’ 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.
Illustration:
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.
Solution:
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.
Situation 1:
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.
Situation 2:
A separate clause in the employment agreement is inserted saying ‘that the amount recovered would be in addition to the applicable service tax’
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.
Conclusion
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.

So conclusion
17th November 2015 From India, Aurangabad
The interpretation of certain clauses which has no direct links to the "Employment" environment cannot be justified. If argued that there is no exclusion there is also no inclusion. If this argument of section 66E (e)
"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
In general parlance "service" means employment.
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
In my opinion,
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
Agree with the above.
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
As everybody would agree - the Basic ingredients for a service tax levy is absent in the matter of recovery of notice pay, such as i) rendering service, service provider & receiver ii) consideration iii) determination of invoice value & date iv) classification v) employees no way subjected to levy of ST.
10th January 2016 From India, Bangalore
Agree with Kumar.
This is not a regular activity of the Company; nor the whole purpose of having this punitive measure is to make revenus for services rendered.
The recovery of amount is incidental, like some fines being levied.
11th January 2016 From India, Delhi
Reply (Add What You Know) Start New Discussion

Cite.Co - is a repository of information created by your industry peers and experienced seniors. Register Here and help by adding your inputs to this topic/query page.
Prime Sponsor: TALENTEDGE - Certification Courses for career growth from top institutes like IIM / XLRI direct to device (online digital learning)





About Us Advertise Contact Us
Privacy Policy Disclaimer Terms Of Service



All rights reserved @ 2019 Cite.Co