Article: Taxes on employee perquisites & emoluments – A match not made in heaven

Employee Relations

Taxes on employee perquisites & emoluments – A match not made in heaven

The Authority for Advance Ruling (‘AAR’) under the service tax regime, in case of a Global Investment Banking company, while examining the car lease scheme offered to the employees, gave a wide very connotation to “in the course of or in relation to his employment”.
Taxes on employee perquisites & emoluments – A match not made in heaven

Every employer aims to be featured in the coveted list of the best employers or places that the employees look forward to work at. This is further supplemented with the need to hire and more important retain a trained talent-pool. Employers are constantly trying to up their game to improve their basket of offerings to the staff, both cash and perquisites, in a lucrative manner. In most cases, these elements trigger tax costs that the organizations either remain blindly exposed to or just consciously assume from their own pocket. Some of the perquisites offered include canteen facilities, transportation support, gymnasium, healthcare, insurance, car lease, premium parking spots, etc.

The employers invariably procure such services from third party vendors on payment of appropriate taxes and in turn make the same available to their employees. These facilities are consumed by the employees in the course of their employment and in some cases, the employers may recover a nominal amount or an amount equivalent to the expense incurred i.e. without any profit. The recovery may be in the form of adjustment to CTC, debit from salary & other emoluments, etc. Such creativity in designing the employee benefits has been, time and again, subjected to scrutiny for determining, whether the same constitutes a supply transaction, in any manner. Consequently, this imposes the need to adopt a position under (i) Income tax laws, and (ii) Indirect taxes (payment of tax & eligibility to avail input tax credit on procurements).

The dilemma of whether recovery made from employees is a supply, came into existence first upon introduction of negative list-based taxation under the erstwhile service tax regime. Wherein, the term “service” was defined to exclude provision of service by an employee to the employer in the course of or in relation to him employment. This definition inevitably led to the uncertainty regarding taxability of various facilities which are provided by the employer to the employee, on the premise that services from employer to employee are not excluded from the scope of levy.

To further complicate the issue, a draft Circular vide F. No. 354/ 127/ 2012, dated July 27, 2012, clarified that cases entailing recovery of an amount from the employees, shall be considered as supply of services liable to service tax. It further clarified that, the status of the employee becomes that of a service recipient, when they consume facilities offered by the employers. Though, the draft Circular was never finalized, it undeniably created more problems than solutions. 

The Authority for Advance Ruling (‘AAR’) under the service tax regime, in case of a Global Investment Banking company, while examining the car lease scheme offered to the employees, gave a wide very connotation to “in the course of or in relation to his employment”. It held that any services provided by employer to the employee in the course of employment, does not amount to provision of service. 

In complete contrast to above, the Hyderabad CESTAT in case of a large Cement Company, while deciding on the eligibility to avail input tax credit on the services procured to provide facility to employees; held that to the extent of the amounts recovered from employees, the employer-employee relationship does not exist. Instead, they step into the shoes of a service provider and a service recipient. 

This saga continues even under the GST regime, where the scope of the term “supply” has an extremely wide coverage to encompass all forms of supply, with deemed inclusions and specified exclusions. The most crucial aspect is that the supply must be made, in the course or furtherance of business. Further, supplies between related persons (which include employees) without a consideration is deemed to be a supply, whereas, Services by an employee to the employer in the course of or in relation to his employment, have been excluded from the scope of supply (Entry 1 of Schedule III). 

Upon advent of GST, a Press Release dated July 10, 2017, was issued to provide some clarity on the employer-employee transactions. It stated that the supplies made by employer to the employee in terms of the employment agreement, will not be subjected to GST. However, this clarity was short-lived, as the AAR in different States started pronouncing rulings that contradicted the said position.

The GST AAR in the State of Kerala, Gujarat and Haryana, have concurrently held that provision of canteen facility to employees, amounts to a supply transaction. They opined that supply of food to the employees, is a transaction incidental or ancillary to the main business and hence, the same was held to be in the course or furtherance of business. Further, the AAR Haryana commented that the exclusion under Entry 1 of Schedule III, only applies to services provided by employee to the employer and not vice-versa.

Whereas, the AAR in the State of Maharashtra and Uttar Pradesh have echoed that recovery made towards medical insurance premium, is not a supply. Remarkably, the authorities concluded that recovery of medical insurance premium is nowhere connected with the Applicants business and neither it can be held, that it is incidental or ancillary to the main business.

Interestingly, in case of provision of transport facility, the AAR in the State of Maharashtra and Uttar Pradesh Ruled in favour of the Applicant. The AAR Uttar Pradesh placed reliance on the Press Release and concluded that the transaction is not in the course or furtherance of business. Further, AAR Maharashtra pronounced that the transaction is not a supply by virtue of Entry 1 of Schedule III. However, the AAR Haryana ruled in favour of the revenue, by stating that the transaction is in furtherance of business and Entry 1 of Schedule III excludes services provided by employees only.

A ruling in case of recovery of parking charges, was recently pronounced by the Appellate Authority for Advance Ruling, Uttar Pradesh. Though, the authority ruled in favour of the Applicant, it held that recovery of parking charges, qualifies as a supply of service. However, the relief was provided on the ground that the value of supply is NIL, as the amount recovered from the employee qualifies as a pure agent recovery.

The employers in the hope of getting an authoritative ruling on the subject matter, approached the AAR in different States. However, this proved to be fatal, as the AAR of different States provided inconsistent rulings by adopting diverse methodology to interpret the same legislation. Hence, until the matter is resolved by the High Courts or the Supreme Court, the employers will certainly be in a tough spot. 

Till then, the employers are advised to revisit the positions adopted with respect to employee recovery and review the underlying documentation. The employment agreement and the HR Policies on employee benefits, will play a crucial role when the matter is assessed/ disputed by the tax authorities.

An additional argument without prejudice to other aspects noted above, which is still untested, is where does the supply element arise in the case on hand. Do such recoveries, not lack an active quid pro quo, sans which the activity would not constitute a supply as defined under the GST laws. The supplies are made by a third party and directly consumed by the employee or for its benefit. It would be difficult to assume that another repeat supply takes place from employer to the employee (especially since no profits are made in such recoveries). This could also, lead to debates on the pure agent position.  The pure agent position, however, would not further the cause of availment of credits and hence, that argument is brushed aside.

Some other positions that a select few employers have taken is that they have offered the deductions or employee recoveries under GST at the same value at which it is procured from vendors.  The tax so payable is set-off against full input tax credit availed on procurements. This is based on the principle that the procurement bears an exclusive nexus to the taxable supplies and since offered to tax, it can no more be viewed as procurements for personal consumption of the employees. The issue being whether such practice is full compliance at zero cost, or does it trigger exposures that have not been thought about. A worthy mention at this juncture would be the position that the employers take under the income tax laws and how they contradict it, while assessing the GST impact on the same, in word and spirit.  

Illustratively, for a car lease scheme, under income tax the position taken would be that the vehicle is provided for official work but the same is incidentally used for personal purposes by the employee, which cannot be valued and hence, deemed perquisite value (some minimal numbers) is adopted for TDS purposes. However, as a precise amendment to CTC (for car lease) is available on records; then how can it be argued that such adjustment is not quantification of personal use? In such a scenario, the employers either expose the employees to a higher taxation on salaries or expose themselves under GST by risking credits taken on procurements since the use will have to be consistently viewed as employee’s personal. This is a double jeopardy. It is important to reiterate that the resolution lies in the way the employment contracts are written.

Further, a new debate surfacing off late is regarding employee benefits that are also a statutory obligation such as covid insurance requirements, mandatory canteen facilities, etc. The employers are willing to take a position that, first, input tax credit is eligible on said expenses as it is a mandatory business cost and second, since it is a statutory obligation, the same cannot be considered as a taxable supply from employer to the employee, in any manner.

The authors’ views are personal.

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Topics: Employee Relations, #GuestArticle

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