GST: The Curious Case Of Perquisites For Employees

Over the past one year, the government has moved very briskly to push the Goods and Services Tax (GST) reform in India. The macroeconomic idea behind GST has always been very simple - to consolidate all the taxes levied on goods and services across India and bring them under one single umbrella of tax.

The scope of GST is extremely wide; between goods defined as ‘every kind of movable property’ and services being ‘anything other than goods’, it is understood that supply of all movable goods and services made for a consideration, is within the purview of GST. Additionally, the government has also identified a few typical transactions (under Schedule 1) which would be considered as taxable supply even if they were made ‘without consideration’.

The current indirect tax laws may not be equipped to deal with transactions where consideration is either paid in kind or not paid at all. For example, Value Added Tax or Sales Tax legislation do not contain a provision for dealing with transactions of barter or exchange. Similarly, in the case of Service Tax legislation, if a service is provided without consideration, the same cannot be taxed for lack of any consideration.

Further, of the four transactions mentioned under Schedule 1, Clause 2 mentions that any supply of goods or services between related parties when made in the furtherance of business, shall be considered within the ambit of taxable supply for GST. A reference to the definition of related parties reveals that even employer and employees are considered as related parties. Thus, the aforesaid clause can be interpreted to bring under its ambit a wide range of transactions taking place between employers and employees for which there is no consideration.

However, the government has curtailed the scope of taxable transactions between employers and employees with the insertion of Clause 1 of Schedule 3 of the CGST Act, 2017 where it is mentioned that services provided by an employee to the employer in the course of employment are to be neither treated as supply of goods nor supply of services. Accordingly, any emolument or salary paid by the employer to his employee, in lieu of employment, is likely to be outside the ambit of GST.

But then drawing this fine line between what shall form a part of ‘remuneration for employment’ and what shall not, will certainly be a challenge for the employers.

The Contours Of Employment, And The Perquisite Beyond

As the maverick entrepreneur Richard Branson puts it very subtly, “clients do not come first. Employees come first. If you take care of your employees, your employees will take care of your clients”. Over the years, organisations have developed various ways of rewarding their employees. These include ways and means other than compensations in the form of salary or bonus – as perquisites. A few examples of such transactions are as follows:

• Supply of mobiles/laptops to employees.
• Provision of free of cost canteen services.
• Provision of free of cost transportation.
• Provision of gifts to employees on the occasion of festivals like Diwali, Christmas etc.
• Provision of cars (with or without a chauffeur) to employees and so on.

These perquisites, apart from the normal salary, are usually considered under the larger prism of remuneration, as they play an important role in employee motivation. However, the precise scope of ‘in relation to employment’ has not been defined under the CGST Act, 2017.

In common understanding, anything up to the limit of Cost to Company’ (CTC) and a bonus is considered a part of the ‘remuneration to employee’ and the rest is considered as a perquisite. But, in the absence of a clear definition of ‘in relation to employment’ under GST legislation, one can never be certain about the interpretation of the law.

Gifting Small Relief To Employees

In the earlier versions of the GST legislation (November 2016), Schedule 1 consisted of matters to be treated as supply even if made without consideration; Clause 2 of Schedule 1 included ‘all the supplies made to related persons in the course of furtherance of business without any consideration’.

Various representations were made to the government by those aggrieved by the clause to clarify, modify or delete it. The government partially tried to douse this fire by introducing a new proviso in the GST legislation which was tabled in the Lok Sabha. As per the amendment, a proviso has been added to Clause 2 of Schedule 1 which reads that ‘gifts’ given by an employer to an employee during the course of a financial year under Rs 50,000 would not be considered as supplies without consideration. This may be viewed as a partial relief where small gifts made by employers to employees are outside the ambit of the clause.

Further, from the drafting of this clause, the purpose of providing clarity regarding what the government is intending to tax under this clause seems to be more or less defeated. The term used in the proviso is ‘gifts’ made by employers to employees. However, the term ‘gift’ has not been defined anywhere.

An argument may be considered that this term could cover only ‘goods’ and not services. The term ‘gift’ has been defined under Transfer of Property Act, 1882 as ‘transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, to another’. Accordingly, as per general understanding, ‘gift’ would only include moveable property (i.e. goods) and immovable property (i.e. outside the purview of GST), but would not include services.

Contrary to the general understanding of gifts, a ‘voucher’, which is a popular medium of giving ‘gifts’ in the corporate world, can be construed either as goods or services or both, depending upon the case. Thus, until and unless the GST legislation directly defines the term ‘gift’, the confusion regarding ‘what shall be construed as a gift’ will prevail.

Challenge At Hand For Employers, And The Way Forward

Given the ambiguity surrounding the employee emoluments, assigning a perquisite value to employees could prove to be a major challenge for the employers. In order to tax gifts from employers to employees, the employers will have to ascertain what value shall be assigned to such gifts?

Currently, under Central Excise legislation, alternative mechanisms to arrive at a value for goods and services is prescribed. For instance, under the Central Excise legislation, there are specific valuation rules for goods sent as free samples or goods captively consumed within the factory of production. Similar valuation rules could also be proposed for valuing gifts to employees.

Having considered this, employers may have to wait for either a clarification, issuing of rules, or a valuation mechanism to arrive at a value for such ‘gifts’. In the meanwhile, employers could initiate collating employee-related information in the background and start redefining the components of employee CTC to ensure the maximum amount of benefits given to the employee is provided under the aegis of a ‘remuneration in lieu of employment’, thus ensuring that they are tax-free.

Jigar Doshi is an indirect tax partner and Ravi Soni is an executive at SKP Business Consulting LLP. The views are personal in nature.

The views expressed here are those of the authors’ and do not necessarily represent the views of BloombergQuint or its editorial team.