Executive Hook: The Invoice You Didn't Expect
The "Great Resignation" is over, but the "Great Recovery" has begun. In a move that has stunned tax consultants and CHROs alike, the Directorate General of GST Intelligence (DGGI) has opened a new front in its revenue collection drive: "Input Tax Credit (ITC) Reversal on Notice Pay."
For years, the industry operated on the belief that "Notice Pay Recovery" (money paid by an employee to leave early) is not a taxable service. The Madras High Court ruling in 2020 seemed to settle this.
But in January 2026, the DGGI changed the narrative. They aren't asking for GST on the notice pay. They are invoking Rule 42 of the CGST Rules.
The logic is brutally simple:
You (the company) bought laptops, rented office space, and purchased software licenses for the employee to generate "Taxable Output" (Client Services).
When the employee leaves early and pays you "Notice Pay," that transaction is considered an "Exempt Supply" or "Non-GST Supply."
Therefore, the Input Tax Credit (ITC) you claimed on those laptops and rent is no longer fully valid. You must "Reverse" a proportionate amount of that credit back to the government.
This is the "GST Clawback." It is a retrospective liability that runs into Crores for high-attrition IT firms. And companies aren't absorbing this cost—they are passing it on to the exiting employee.
Have you checked your Full & Final (F&F) settlement statement recently? Are you unknowingly paying a 'Hidden Tax' disguised as a 'Recovery Fee' to cover your employer's GST liability?
Section I: The Tactical Anatomy of "Fiscal Friction"
To understand the mechanics, we must look at the "Common Credit" pool. A company claims GST credit on rent, electricity, and IT infrastructure. This credit is valid only if used for "Business Purposes."
The DGGI argues that "Notice Pay Recovery" is a form of "Tolerating an Act" (the act of leaving early). While the courts have debated if that act is taxable, the DGGI's new stance sidesteps the debate. They argue: "Fine, don't pay tax on the notice pay. But you cannot keep the Input Credit you claimed for that period either."
This creates a "Double Whammy" for the employer. They lose the employee, and now they have to pay back the tax benefits they claimed on that employee's infrastructure.
To mitigate this, Finance Directors are instructing HR to add "GST Indemnity Clauses" in exit letters. The "Recovery Amount" is being grossed up to cover the ITC reversal. An employee buying out a ₹1 Lakh notice period is suddenly asked to pay ₹1.18 Lakhs, with the extra ₹18k technically being the company's tax loss.
Is your Finance team quietly adjusting the F&F formulas to include this 'Clawback'? If so, are you disclosing this to the employee, or risking a Consumer Court verdict for 'Unfair Trade Practice'?
Section II: The "Invisible" Blast Radius
The operational fallout is the "Exit Friction Spike." Resignations are becoming hostile negotiations. Employees are refusing to pay the inflated recovery amounts. They are challenging the F&F in Labour Courts, arguing that "Tax Liability" is the employer's problem, not theirs.
The "Invisible Cost" is the "Notice Period Cartel." This tax technicality creates a perverse incentive for companies to make notice periods longer and buyouts harder.
If an employee serves the full notice, they generate "Taxable Output." The company keeps the ITC.
If they leave early, the company faces the "ITC Reversal."
Therefore, the 90-Day Notice Period is no longer just a "Knowledge Transfer" tool; it is a "Tax Shield." Companies are colluding to enforce rigid notice periods to protect their GST Input Credit ratios. The "Cartel" investigation by the CCI (mentioned in previous briefs) is fueled by this hidden financial motive.
For the Founder, the risk is "Retrospective Audit." If you haven't been reversing ITC on notice pay recoveries for the last 5 years, the accumulated liability + interest (at 18%) could wipe out a significant portion of your reserves.
Section III: The Governance Playbook: The "Gross-Up" Contract
The solution is transparency and contractual clarity.
1. The "Tax-Inclusive" Employment Contract: Update your offer letters. Explicitly state: "In the event of a notice period buyout, the recovery amount shall be subject to applicable taxes and statutory reversals." By making the employee sign this at entry, you protect the company at exit.
2. The "Performance-Linked" Waiver: Move away from "Cash Recovery." Instead of asking the employee to pay cash (which triggers the GST issue), structure the buyout as a "Waiver of Variable Pay."
Old Way: Employee pays ₹1 Lakh.
New Way: Company deducts ₹1 Lakh from the pending Performance Bonus. Since "Salary/Bonus" is outside the purview of GST (Schedule III), this deduction is not a "Supply," and therefore does not trigger the ITC reversal or tax demand. It is a cleaner, tax-efficient way to settle dues.
3. The "Shadow Ledger": The CFO must maintain a "Shadow Ledger" tracking the exact ITC reversal liability per employee. Don't use a flat rate. Use data to prove to the DGGI that the reversal should be minimal, based on actual attribution, not a blanket formula.
The Final Verdict
The taxman is the silent partner in every resignation. The friction in the job market isn't just about talent; it's about tax credits. Smart companies will engineer their exit policies to minimize this friction; the rest will find themselves fighting a two-front war against their former employees and the GST intelligence.
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7The "Great Resignation" is over, but the "Great Recovery" has begun. In a move that has stunned tax consultants and CHROs alike, the Directorate General of GST Intelligence (DGGI) has opened a new front in its revenue collection drive: "Input Tax Credit (ITC) Reversal on Notice Pay."
For years, the industry operated on the belief that "Notice Pay Recovery" (money paid by an employee to leave early) is not a taxable service. The Madras High Court ruling in 2020 seemed to settle this.
But in January 2026, the DGGI changed the narrative. They aren't asking for GST on the notice pay. They are invoking Rule 42 of the CGST Rules.
The logic is brutally simple:
You (the company) bought laptops, rented office space, and purchased software licenses for the employee to generate "Taxable Output" (Client Services).
When the employee leaves early and pays you "Notice Pay," that transaction is considered an "Exempt Supply" or "Non-GST Supply."
Therefore, the Input Tax Credit (ITC) you claimed on those laptops and rent is no longer fully valid. You must "Reverse" a proportionate amount of that credit back to the government.
This is the "GST Clawback." It is a retrospective liability that runs into Crores for high-attrition IT firms. And companies aren't absorbing this cost—they are passing it on to the exiting employee.
Have you checked your Full & Final (F&F) settlement statement recently? Are you unknowingly paying a 'Hidden Tax' disguised as a 'Recovery Fee' to cover your employer's GST liability?
Section I: The Tactical Anatomy of "Fiscal Friction"
To understand the mechanics, we must look at the "Common Credit" pool. A company claims GST credit on rent, electricity, and IT infrastructure. This credit is valid only if used for "Business Purposes."
The DGGI argues that "Notice Pay Recovery" is a form of "Tolerating an Act" (the act of leaving early). While the courts have debated if that act is taxable, the DGGI's new stance sidesteps the debate. They argue: "Fine, don't pay tax on the notice pay. But you cannot keep the Input Credit you claimed for that period either."
This creates a "Double Whammy" for the employer. They lose the employee, and now they have to pay back the tax benefits they claimed on that employee's infrastructure.
To mitigate this, Finance Directors are instructing HR to add "GST Indemnity Clauses" in exit letters. The "Recovery Amount" is being grossed up to cover the ITC reversal. An employee buying out a ₹1 Lakh notice period is suddenly asked to pay ₹1.18 Lakhs, with the extra ₹18k technically being the company's tax loss.
Is your Finance team quietly adjusting the F&F formulas to include this 'Clawback'? If so, are you disclosing this to the employee, or risking a Consumer Court verdict for 'Unfair Trade Practice'?
Section II: The "Invisible" Blast Radius
The operational fallout is the "Exit Friction Spike." Resignations are becoming hostile negotiations. Employees are refusing to pay the inflated recovery amounts. They are challenging the F&F in Labour Courts, arguing that "Tax Liability" is the employer's problem, not theirs.
The "Invisible Cost" is the "Notice Period Cartel." This tax technicality creates a perverse incentive for companies to make notice periods longer and buyouts harder.
If an employee serves the full notice, they generate "Taxable Output." The company keeps the ITC.
If they leave early, the company faces the "ITC Reversal."
Therefore, the 90-Day Notice Period is no longer just a "Knowledge Transfer" tool; it is a "Tax Shield." Companies are colluding to enforce rigid notice periods to protect their GST Input Credit ratios. The "Cartel" investigation by the CCI (mentioned in previous briefs) is fueled by this hidden financial motive.
For the Founder, the risk is "Retrospective Audit." If you haven't been reversing ITC on notice pay recoveries for the last 5 years, the accumulated liability + interest (at 18%) could wipe out a significant portion of your reserves.
Section III: The Governance Playbook: The "Gross-Up" Contract
The solution is transparency and contractual clarity.
1. The "Tax-Inclusive" Employment Contract: Update your offer letters. Explicitly state: "In the event of a notice period buyout, the recovery amount shall be subject to applicable taxes and statutory reversals." By making the employee sign this at entry, you protect the company at exit.
2. The "Performance-Linked" Waiver: Move away from "Cash Recovery." Instead of asking the employee to pay cash (which triggers the GST issue), structure the buyout as a "Waiver of Variable Pay."
Old Way: Employee pays ₹1 Lakh.
New Way: Company deducts ₹1 Lakh from the pending Performance Bonus. Since "Salary/Bonus" is outside the purview of GST (Schedule III), this deduction is not a "Supply," and therefore does not trigger the ITC reversal or tax demand. It is a cleaner, tax-efficient way to settle dues.
3. The "Shadow Ledger": The CFO must maintain a "Shadow Ledger" tracking the exact ITC reversal liability per employee. Don't use a flat rate. Use data to prove to the DGGI that the reversal should be minimal, based on actual attribution, not a blanket formula.
The Final Verdict
The taxman is the silent partner in every resignation. The friction in the job market isn't just about talent; it's about tax credits. Smart companies will engineer their exit policies to minimize this friction; the rest will find themselves fighting a two-front war against their former employees and the GST intelligence.
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Notice pay recovery certificate.doc
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