How Does Your Company Handle Service Tax on Notice Pay Recovery and Payments?

Service Tax on Notice Pay Recovery

I would like to know what the current standard practice is in your organization regarding the applicability of Service Tax on Notice Pay recovery, based on the points given below:

1) In case there is a recovery from the employee of Rs. 20,000:
- a) Will the recovery from the employee be Rs. 20,000 + Service Tax, or
- b) Will the recovery from the employee be Rs. 20,000 only?
- In case it is b), who will bear the tax?

2) In case of termination or a situation where the employee is asked to leave, and the organization has to pay a notice of Rs. 20,000:
- a) Will the payment to the employee be Rs. 20,000 + Service Tax, or
- b) Will the payment to the employee be Rs. 20,000 only?
- In case it is b), who will bear the tax?

Kindly forward your views as this is critical, considering the apprehension that the employee may argue that the same was not mentioned in the Appointment letter!

Regards,
Atul Singh

Service Tax on Notice Pay: A Misunderstanding

Why would Service Tax be invoked against notice pay at all? An employee remains an employee until the FnF formalities are completed within the due legal framework. Just because a resignation or termination has ended the relationship, the employee does NOT become a vendor! And he/she is NOT raising a tax invoice to your company at any stage.

I personally find this Service Tax on FnF debate (there have been a few other instances in this forum) very disturbing and ridiculous. At this rate, soon we will have HR managers (damagers?) insisting that every employee register themselves for Service Tax under the Finance Act before salaries are paid!

Regards,

Service Tax on Salary and Notice Pay

Service tax is not payable on salary or notice pay as the relationship between employer and employee still exists even during notice pay.

Please let us also know what is the rate of service tax you would levy on a "salary"? And, of course, the law that mandates this.

Understanding Service Tax on Salary and Notice Pay

Section 65B(44) of the Finance Act, 1994, as introduced w.e.f. 1-7-2012, 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) -
- (b) a provision of service by an employee to the employer in the course of or in relation to his employment
- (c) -

Thus, services provided by an employee to an employer have been excluded from the definition of 'service' itself.