Impact of GST on employer-employee transactions
Almost 10 days after the historic tax reform goods and services tax (GST) was launched on July 1, clarity has started emerging on tax incidence with regards to salary benefits offered by employers to their staff.
Most of the benefits provided by employers to their staff such as health check-up facilities, mediclaim, mobile handsets would not attract GST keeping tax liability in the new indirect tax regime almost same compared to the previous structure.
A clutch of benefits as part of the offer letter such as cash allowance given to staff on successful reference, house lease, long service awards, employee welfare schemes including an off-site/town hall and free gym would be out of GST net.
The employers would, however, be liable to pay GST on gifts exceeding Rs50,000 in value. For this purpose, the companies would have to keep the record of all the tangible monetary benefits to calculate annual tax outgo on this account.
In a study on employer-employee transactions in the new indirect tax regime, top consultancy firm PricewaterhouseCoopers (PwC) has said that GST would be payable in cash value of gifts provided to an employee during a financial year exceeds Rs 50,000 and principles of open market value would apply.
"In case individual gifts given during a financial year exceeds Rs 50,000 (say Rs 55,000), GST is to be paid on Rs5,000. In case single gift exceeding Rs 50,000 (say Rs 55,000) is given to the employee, GST should be applied to the full value of Rs 55,000," the consultancy firm has said.
Many companies in India offer gifts such as miniatures, cars and stationeries on various occasions such as Diwali or farewell to their staff. The employers would have no GST liability in case of cars given to staff during the course of employment for both personal as well as official use. It would not be considered a 'supply' in the new tax regime. Car obtained on financial lease by the company from the dealer and given to employees for official use would also be exempt from GST. In both the cases, input tax credit would not be available to companies as they do not come under the definition of 'supply.'
In the indirect tax law, supply refers to sale, exchange and barter of goods and services for levying the tax. In case there are other supplies made by the employer to the employee (with or without consideration), the same may qualify as ‘supply’. An employee benefit would not be treated as supply provided the same is in course of or in relation to the employment.
Since employer and employee have been deemed as ‘related person’ under CGST Act (section 15), valuation for supplies which are taxable under GST is to be governed in terms of the Valuation Rules issued for related party transactions.
Explaining the liability of GST, PwC said that in case a car is obtained on financial lease by the company from the dealer and given to employees for official use, it is recorded as an asset in company's books. The amount equivalent to car entitlement is reduced from the basic salary of the employee and a notional amount is added as a prerequisite in employees' CTC (cost-to-company), it said.
"(There would be no) GST liability since such benefits are extended by the company to the employee for official use/purposes (the underlying employment contract should also substantiate the same)," the PwC analysis said.

Since the company has purchased the car, in light of specific restriction on credit eligibility for motor vehicles, tax paid on procurement of motor vehicle should not be eligible for a credit to the company, it observed.
As regards lunch organised by companies where food is directly supplied to the employees by the caterer and an invoice (at a subsidised rate) is raised to the company, the GST liability should not arise. But for this, an agreement would need to be signed between the company and the caterer to this effect.
"Taxes paid on outdoor catering would be available as credit where company discharges GST on outward supply to the employee at open market value, otherwise the same would be a cost," PwC said.
Further, there would not be GST liability on annual health check-up facility to employees since there is no underlying supply per se by the company. Taxes paid in relation to health services should not be eligible for the credit.
"The company which provides these services like medical insurance, health insurance or personal accident insurance they will charge GST on these transactions. But the company which buys it for its employees will not be able to take credit. The present regime is more or less same to that of the previous one. The only difference they have in the GST is that if there is a gift given by the employer to the employee and the value is more than Rs 50,000 in a year in that case the employer has to pay GST on that. So, regularly what an employer gives to an employee nothing much has changed," said MS Mani, senior director (indirect tax) at Deloitte Haskins & Sells LLP.

While the new regime does not put GST liability on companies in a slew of perks such as mobile bill expenses, relocation benefits and temporary accommodation to their staff, offers like free cab service and sale of used laptops would attract the GST levy. Both free cab service and sale of laptops would come under the ambit of supply and hence tax will be levied.
With cab facility being a related party transaction (and employee not eligible to claim input tax credit), GST would need to be paid as per the open market value (which may be considered as the amount paid by the company to transporter).
"Used laptops are given by the company to employees on FoC basis or at subsidised value. Such transaction would be treated as supply and accordingly, liable to GST," the PwC analysis said.
GST is billed as game-changer tax reform which has subsumed most of the indirect taxes such as VAT, service tax, octroi, luxury tax, special additional duty (SAD) and central sales tax levied by Centre and states. With the roll-out of this, all goods and services barring a few such as petroleum and alcohol have been kept under four-tier tax structure of 5, 12, 18 and 28 per cent besides applicable cess. This has paved the way for 'One Nation One Tax' turning India into a unified market.
Columnist: 
Nirbhay Kumar
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