There are difference of opinion about GST applicability to notice pay. Section 65B (44) of Finance Act, 1994, defines service as "any activity carried out by a person for another for consideration, and includes a declared service, but shall not include:
provision of service by an employee to the employer in the course of or in relation to his employment."
Therefore, the service provided by employee to employer in course of employment is excluded from service tax levy. But when an employee reigns from service, he is expected to serve or remain for a certain period or compensate by paying amount equal to the notice period salary as notice pay. Not remaining for the notice period may cause some obstacles to the employer. This is actually toleration and if by the act of employee not serving notice period, if the employer had to tolerate and for that an amount is recovered, then that recovery of notice pay would be liable for service tax.
In Manappuram Finance Ltd. v. Assistant Commissioner of Central Tax and Excise - [2022] (Kerala) it was held that GST is not applicable to notice pay recoveries. In case of M/s. QX KPO Services Pvt Ltd vide Order in Appeal no. AHM-EXCUS-001-APP0107-17-18 dated 29.09.2017, the Commissioner (Appeals) has held that no service tax is payable on notice pay recovery.
Under any circumstance, the amount of recovery shall not include GST. If the employer has to pay GST on their recovery, they have to pay it from their pockets and they cannot deduct it from the employees.