Employee Leaving Organization without serving notice period liable to18% GST on Notice Recovery!!!

Notice pay recovery is the most common phenomenon in any Organization. Certainly, one of the debatable topics when it comes to taxability under the GST Law.

A contract of employment is a contract between the employer and an employee where the employee promises to provide employment services to an employer in return for a consideration i.e. “salary”. Further, in most cases, the contract of employment also provides for recoveries on account of breach of such contract.

18% GST on recovered notice pay for employees while leaving the job without service notice period. It is terming as "Tolerating an Act", the Gujarat Authority of Advance Ruling said that recovery of the notice pay amount would be in lieu of "Breach in serving stipulated notice period".

An individual leaving his / her job without serving the stipulated notice period will now cost employees 18 percent goods and services (GST) tax on the pay recovered for the notice period duration.

The Gujarat Authority of Advance Ruling has held that an employee exiting a company without completing notice period would be liable to pay 18 percent GST on notice recovery.

The ruling was issued in a case involving Amneal Pharmaceuticals, an export oriented unit (EOU) engaged in the manufacturing of pharmaceuticals products based out of Ahmedabad. One of the employees had sought an advance ruling on the issue. The notice period in question was three months. The authority has held that recovery of amount from an employee for breach in serving the stipulated notice period would qualify as "tolerating an act" on the part of the employer and would be liable to GST.

Further, the amount will not be covered under the exemption provided to employee - employer relationship under the GST Act.

Case Reference:

Case Name : In re Amneal Pharmaceuticals Pvt. Ltd. (GST AAR Gujrat)

Appeal Number : Advance Ruling No. GUJ/GAAR/R/51/2020

Date of Judgement/Order : 30/07/2020

Courts : AAR Gujarat Advance Ruling

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