Facing GST Deductions on Notice Period Recovery: How Can I Resolve This Without Paying GST?

In my notice period recovery, they deducted GST as per the offer letter and the exit policy. I have sent an email stating that the GST deduction (other deduction in the FnF statement) cannot be paid and that the remaining recovery can be paid. I have not received any reply yet. What next action can be taken from my end to pay recovery without GST? Please advise.

In the offer letter and exit policy, they haven't mentioned GST deduction, but it has been deducted in my recovery.

Hi,

Employment services and GST exemption

Employment services are exempt from GST. Thus, some professionals believe that since notice pay recovery occurs in the course of employment, it should also be exempt from GST. However, it should be noted that Schedule II of the CGST Act states certain activities that shall be treated as a supply of goods or services.

Activities considered as supply of goods or services

Such activities include 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation.' There can be different points of view on this matter:

It could be contended that an employee receives the notice period pay for not serving the notice period prescribed by the employer. The action of not serving the notice period leads to tolerating the act of an employer. Thus, GST is applicable to notice pay recovery.

In case the notice pay policy does not contain such an agreement for tolerating the act of an employee, then such notice pay recoveries are not subject to GST.

Need for clarification from GST authorities

This is a long-pending issue and needs clarification from the GST authorities. Taxpayers can make representations to seek clarification, as this is a prevalent issue. There are also a few crucial decisions made in favor of the assessees stating that such notice pay recoveries are not subject to GST.

Thanks

There are differences of opinion about GST applicability to notice pay. Section 65B (44) of the 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 the provision of service by an employee to the employer in the course of or in relation to his employment."

Therefore, the service provided by an employee to an employer in the course of employment is excluded from service tax levy. But when an employee resigns from service, he is expected to serve or remain for a certain period or compensate by paying an amount equal to the notice period salary as notice pay. Not remaining for the notice period may cause some obstacles for the employer. This is actually toleration, and if by the act of the employee not serving the notice period, the employer had to tolerate and for that an amount is recovered, then that recovery of notice pay would be liable for service tax.

Manappuram Finance Ltd. v. Assistant Commissioner of Central Tax and Excise

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 the 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.

GST and 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.