The new GST regime may prompt India Inc to restructure salary packages and HR benefits extended to their employees in the days ahead. According to a report in The Economic Times, reimbursements on home rentals, telephone charges beyond a certain limit, medical premiums for extra coverage, gym use, uniforms or even re-issuing identity cards could be subjected to the new Goods and Services Tax.
It added that tax experts have starting advising firms to get their respective human resources departments to look into this matter, especially in the wake of the Authority for Advance Rulings' (AAR) recent judgement regarding canteen charges.
In March, Caltech Polymers Pvt. Ltd had approached AAR, a facilitation body to help taxpayers ascertain their the income tax liability - and thereby avoid long-drawn and expensive litigation - asking whether the canteen service provided to its employees according to the provisions of the Factories Act, 1948, would come under GST. The company had added that it was recovering the canteen running expenses from its employees without any profit margin.
Earlier this month, AAR had ruled that the recovery of food expenses from employees for canteen services provided by a company would come under the definition of 'outward supply' as defined in Section 2(83) of the Act, 2017, and therefore, taxable as a supply of services under GST. This is significant because although the AAR's rulings are only binding on the applicant, its decision can have persuasive value on cases involving similar transactions.
Canteen service is only one among several recoveries that corporates make from their employees. So, as pointed out by the report, GST on employer to-employee supplies could cause employers to stop charging for services rendered in a bid to save on that levy. "This may impact the salary packages, given the employers may want to retain the same cost to company for employees," Bipin Sapra, partner, EY, told the daily, explaining that employer-employee relationship is treated as that between related party under GST and, hence, these services will be liable to GST on whatever is the applicable open market value. "Eventually the companies will see the overall cost and additional GST will be passed on to employees... or some of them may just stop the practice of providing subsidised meals to employees to avoid additional compliances and possibility of dispute on valuation. There is definitely a case for exemption here," added Pratik Jain, indirect tax leader, PwC.
The bad news is that companies may not only have to pay GST on the full value for services provided at concessional rates, but may have to cough up the tax even if no charge is recovered from the employees. At the very least, going by the AAR ruling, tax experts foresee enhanced compliance burden on India Inc.