An advance ruling authority (AAR) had previously said the GST would be applicable on employee recoveries such as notice pay, group insurance and phone bill.
The previous ruling stated that, as with notice pay, the business is “providing a service” to an employee and therefore GST should be applied on that.
Under the GST, tax is levied on any activity considered to be a supply of a service, whether direct or deemed, ET had said on November 30.
The decision is in the case of refineries in Bharat Oman. The company had approached AAAR in this regard.
AAAR has now reversed the decision. “Just because the employer is compensated does not mean that a service was provided to the employer or that the employer tolerated any act of the employee for an early departure,” AAAR said.
“The Appeals Authority rightly overturned the earlier ruling and once again insisted on the doctrine that ‘provision’ neither contemplates nor encompasses a unilateral act, that is, say that there has to be a consideration for a transaction to be considered procurement, ”said Harpreet Singh, Partner, Indirect Taxes at KPMG in India.
AAAR also said that businesses will also be able to benefit from an input tax credit in this regard.
Under the GST, any supply of goods or services, even if there is no monetary value attached to them, should be taxable.
“Unless there is an explicit agreement between the parties for the supply of identified goods / services, mere payments between them should not constitute a supply,” Singh said.
While AAR rulings only apply to the business that requests them, tax authorities tend to view them as a precedent, especially if they can increase their tax collections. Industry trackers say tax authorities have already started questioning many businesses about the GST payable on some of these expenses.
Industry trackers have in the past raised concerns about conflicting AAR rulings.
The government has now appealed to the AAAR to respond to some of the controversial AAR decisions.
Most of the controversy surrounding the AAR decisions has centered around product categorization.
Controversies around product categorization reached a climax following several advance rulings by tax authorities. There have been controversies surrounding the rate of the GST on papads, lassis and samosas.
The tax department also provided clarification on GST rates and classification issues related to fresh fruits and nuts versus dried fruits, coconut versus fragrant sweet copra and supari, and flavored illaichi. and coated, and to external batteries sold with UPS / inverter systems, among other issues.