The relationship between employer and employee occupies a special position in GST. Services provided by an employee to an employer in the course of employment are excluded from GST under Schedule III. But the boundary is not always clear, especially for directors, consultants, reimbursements and seconded employees.
The Exclusion in Schedule III
Entry 1 of Schedule III of the CGST Act states that services by an employee to the employer in the course of or in relation to his employment are neither supply of goods nor services.
This means:
- An employee does not charge GST on salary.
- Salary, wages, bonuses and allowances paid under an employment contract are outside GST.
- The employer cannot claim input tax credit on salary because there is no GST charged.
What Is an Employer-Employee Relationship?
The exclusion applies only where a true employer-employee relationship exists. Courts and tax authorities examine factors such as:
- Control and supervision by the employer.
- Fixed working hours and place of work.
- Provision of tools, equipment and infrastructure by the employer.
- Payment of regular salary and statutory benefits like provident fund and gratuity.
- Termination and disciplinary rights.
- Integration of the person into the organisation.
If a person is an independent contractor, freelancer or consultant, the services are not excluded from GST and GST may be payable.
Directors
Directors occupy a special position. Under the Companies Act, directors are not always employees. Under GST, services provided by a director to a company are treated as supply, unless the director is an employee.
- Executive director with an employment contract and salary may be outside GST under Schedule III.
- Non-executive director or independent director providing services without employment is a supplier, and the company is liable to pay GST under reverse charge under Notification No. 13/2017-CT(R).
- Sitting fees paid to directors are subject to reverse charge in most cases.
Reimbursements and Perquisites
Amounts paid by an employer to an employee as salary or allowance are outside GST. However, if the employer supplies goods or services to the employee, the analysis changes.
- Sale of a used company car to an employee may be a supply if the employer is in the business or if ITC was claimed.
- Free residential accommodation or meal vouchers may be treated as perquisites in employment and not as supply by employee, but employer GST implications may arise if the employer provides services to itself.
- Reimbursement of expenses by employer to employee for expenses incurred on behalf of employer is generally not a supply by employee because the employee is not supplying a service independently.
Notice Pay and Termination Payments
Payment of notice pay by an employee to an employer for early termination of employment is generally outside GST because it arises from the employment relationship and is covered by the Schedule III exclusion. However, some authorities have treated notice pay recovered from an employee as consideration for the service of allowing early exit, but the prevailing view is that it is part of the employment contract and not taxable.
Secondment and Manpower Supply
Secondment of employees by a foreign group company to an Indian entity may not be covered by the employment exclusion because the employee's employer remains the foreign entity. The Supreme Court in Northern Operating Systems Pvt. Ltd. (2022) held under the pre-GST service tax law that secondment can constitute a taxable manpower supply service. GST authorities apply this reasoning, making such arrangements liable to reverse charge if the foreign entity does not charge GST.
Practical Compliance Steps
- Classify each engagement as employment or independent contract based on the actual conduct of the parties.
- Maintain employment contracts, offer letters, attendance records and salary documentation to support the Schedule III exclusion.
- For directors and consultants, apply reverse charge where applicable and self-invoice.
- Review secondment arrangements for GST exposure.
How Anuj Desai & Associates Can Help
We help businesses structure employment, director, consultant and secondment arrangements correctly, determine GST applicability, manage reverse charge and defend classification during audits.
Contact Anuj Desai & Associates
Email: office@anujdesaiassociates.com
Phone: 9619456656
Website: https://anujdesaiassociates.com
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