Notice Pay Recovery and Service Tax: Are Resigned Employees Liable?

Notice Pay Recovery and Service Tax

Is notice pay recovery from a resigned employee liable for service tax? Also, is it recovered from the resigned employee? If anyone has a notification or circular in this regard, please share.

Regards.

Notice Pay Recovery and Service Tax

Notice pay recovery is not a service tax-related subject. It is not applicable.

Regards,
Pon

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?

Dear friends, we, the HR group, are using this forum for knowledge sharing and message gathering. If anyone posts anything in this forum, it means there is some information required, and help is expected from knowledgeable persons. I hope no one is playing 'funny games' here (Loginmiraclelogistics, please note and don't comment unnecessarily in the "public forum" if you don't know anything and don't act smart).

Additionally, I would like to inform you that in July 2012, there was an amendment in Service Tax rules. It has come to our attention that some employers started deducting service tax at 12.36% on notice pay period payments (shortfall of notice period) from resigned employees. The reason behind this is that when an employee submits their resignation, the service agreement between both parties (employee and employer) comes to an end, and the employer is providing service to the resigned employee for the remaining notice period. However, there is some dilemma in the service tax amendment, and hence it is not followed by all employers (employers are justifying with their own interpretation).

In case any of you come across this situation or have a copy of the service tax amendment, please share it, as it may be useful to other members.

Regards.

Notice Period Salary Recovery and Service Tax

Notice period salary is recovered while the person is in employment, and there is no service or contract. Hence, service tax is not applicable. The deduction is as per the terms and contract mentioned in the offer letter, and it has to be done as per that.

I do not know who this employer is who has been deducting service tax on notice pay recovery. However, despite doing so much work in service tax, I have not heard of such a thing before. Whoever has taken this interpretation obviously has no knowledge of service tax. They should refer to their 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 the employer to the 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. For example, food/catering services are covered under service tax, so a 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.

I have been charged with the service tax on my notice pay recovery. Please let me know where I can appeal against this.

While I am sure Loginmiraclelogistics never had any intention of poking fun at you or the topic you raised, please also try to take humor in your stride. Can you please 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 clearly understand what you are referring to.

Prima facie, as 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, and the companies may be interpreting it in the wrong way (which happens quite often).

I don't quite understand what you mentioned—".......when an employee submitted his resignation, the service agreement between both of them (employee and employer) has come to an end and the employer is giving service to the resigned employee for the remaining notice period."

I find two points that need elaboration by the legal members:
• The agreement you are referring to is an employment agreement, not a service agreement.
• The resignation letter is only an expression of the intent of ending the agreement. The actual end comes once the relieving letter is issued.

Regards,
TS

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 that the overheads and HR costs you seem to refer to are operational costs and not services attributable to employment.

I also second my friends' requests for you to share the relevant sections for your reference regarding the amendment in Service Tax rules in July 2012.

Regarding Loginmiraclelogistics' remarks, I personally found your comments rather unnecessary, abrasive, and quite offensive. Even in highly serious boardrooms, there is room for humor. I tried looking up the rules on CiteHR and couldn't find a rule that prohibits any of us from smiling when on this forum.

Dear friends, Thanks for these rejoinders from all of you. It appears there has been a misconception in understanding the concept of ST as the provisions of taxation on services become more and more complex and are seen as a domain with potential for filling up the coffers of the exchequer. As a person practicing in ST matters and also HR functions, I can only view that some unscrupulous employers are trying to unnecessarily recover non-existent tax from helpless employees. This is evident from the queries raised by some of our friends. First of all, one should understand that a relationship 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 and due, and settled subsequent to relinquishing the employment can never come under the "services" warranting the recovery of ST from such (ex) employee. Some extra cautious administrators and accountants could have inflicted such avoidable arguments and recovery. This has to be negated by the concerned at any cost to stop the continuance of such wrongful recoveries.

In order to provide some tips to the needy, I attach notes on ST, negative list, etc., for their ready reference.

Of course, there are innumerable notifications issued on ST and settled cases that could clarify certain specific issues, which are available on the respective websites.

Thank you.

For those who are in need of more information on ST matters, please refer to the attached document.

Regards,

Here are the other notifications issued during 2013 as attached.

Notice Period Shortfall and Service Tax

Notice period shortfall is treated as a shortage 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.

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 due to the employee leaving. If it is completed by another employee, there is no service tax involved. Liabilities related to your business decisions are yours alone and cannot be linked to the termination 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.

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.

As per Section 66E(e) of the Service Tax Act, the declared service 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.

Service Tax on Resignation Recovery

The amount recovered on resignation, as a penalty for breach of contract condition falling under clause (e) of section 66E of the Finance Act 1994, makes the company liable for service tax. The company may ask for the service tax amount on the bond value or treat it as inclusive of service tax.

The link to view clause (e) of Section 66E: http://www.taxindiaupdates.in/declar...ervice-tax-law.

One more thing, apart from the Service Tax Law, is that one High Court has given a judgment that binding an employee under a bond is unconstitutional and invalid. So, any employee who faces this situation may file a writ.

Service Tax on Notice Pay Recovery

As per amendments in Service Tax rules from time to time, service tax is now applicable on all services except those mentioned under the Negative List of services provided. Hence, notice pay may be covered under Service Tax Rules as companies collect money from resigning employees for tolerating early termination from employment without serving the notice period. Such receipts could be liable to service tax in the hands of the company, under the provision to tolerate an act or a situation, and service tax could be demanded.

Services in Course of Employment

Under the negative list-based taxation, all services covered under the definition of service as of July 2012 shall be taxable, except for those listed in the Negative List or exempted via mega exemption notification. According to Section 65B (44), the definition of service reads as follows:
“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 an employee to an employer in the course of employment is excluded from the service tax levy.

Service Tax Implication on Short Notice Recovery

It is clear that there is no exclusion or exemption for services provided by an employer to an employee. These are not covered in the exclusion limb of the service definition and include declared services. As per Section 66E (e), declared services include:
‘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 resigning employees for tolerating early termination from employment without serving the notice period. Such receipts could be liable to service tax in the hands of the company, under the provision to tolerate an act or a situation, and service tax could be demanded.

At the same time, under negative list-based taxation, the service tax levy is an activity tax. Service tax is leviable on service being ‘any activity’ for consideration. Though the company is receiving consideration, there is no activity done by the company for the employee in exchange for the 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 or circular clarifying the non-applicability of service tax on notice period recovery. Erring on the side of caution, the service tax could be decided to be paid by the company as follows.

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 a destination-based levy, it could also be collected from the service receiver and paid to the 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 recovering an amount towards short notice could collect and pay the service tax at 12.36% from the employee. As a tax planning measure, the company could insert a clause in the employment agreement stating that service tax is payable extra by the employee as applicable. If the company does not collect extra service tax, it shall bear the service tax out of pocket by calculating the service tax on an inclusive basis as per Sec 67(2) of the Act.

Illustration

Mr. Vijay, a professional software programmer employed at M/s ABC Software Pvt Ltd, with 2 years of experience and drawing a salary of Rs.75,000 per month, wishes to leave the company for a better opportunity. As per the terms of employment, he shall serve a notice period of 3 months. Compute the amount of service tax payable by the company.

In the given case, assuming Mr. Vijay has served only one month of the notice period and did not serve the other two months, agreeing to pay off his short notice.

Situation 1: No separate clause in the employment agreement regarding 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 states 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 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 currently, there is no clarity in the law. Since service tax law is new and developing with grey areas, erring on the side of caution, the recovery towards short notice could be levied to service tax. It is advisable for the employer to remit service tax either by collecting it from the employee or by paying it themselves by calculating service tax on an inclusive basis as illustrated above.

Regards

Interpretation of Clauses in the Employment Environment

The interpretation of certain clauses that have no direct links to the "Employment" environment cannot be justified. If it is argued that there is no exclusion, there is also no inclusion. If this argument regarding 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 Service Tax (ST) on fines, etc.

For example, consider a fine levied for riding a two-wheeler without a helmet, without a driving license, not appearing in court, not wearing a uniform in schools and colleges, arriving late to the office, and so on. Could someone say ST can be levied on 'refraining from an act'? Where is the end? If there are any settled cases available, we may have some clue on the subject to determine what is right.

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?

In my opinion, a company recovering Service Tax should be registered under the Service Tax Rules so that the charged Service Tax can be deposited with the government. It is unclear how the notice period recovery is considered a service on which Service Tax is chargeable.

Limit on Service Tax Applicability

Is there a limit on the value of services above which Service Tax is applicable? Payment of salary/wages or deductions therefrom (short notice period recovery can be termed as deductions) cannot be termed as a service liable to Service Tax. I understand that companies do not issue bills/invoices/notices while charging Service Tax to their resigning employees for recovering the short notice period.

Agree with the above. It seems charging service tax from employees is another instance of such small unscrupulous companies that indulge in activities such as bifurcating minimum wages to save on PF, denying maternity leave to female employees, terminating services when an employee gives notice, having unilateral notice periods, etc. They are the ones who evade taxes, and when it comes to troubling departing employees, they 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 an entirely different thing.

As everybody would agree, the basic ingredients for a service tax levy are absent in the matter of recovery of notice pay. These include: i) rendering service, service provider, and receiver; ii) consideration; iii) determination of invoice value and date; iv) classification; v) employees not being subjected to the levy of service tax.