How will GST impact employee-employer transactions?

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HR to rethink and bring in new guidelines to create a win-win situation for both employee and employer by accommodating the new changes envisaged under GST

The Goods and Service tax is one of the biggest fiscal reforms in India since Independence with the objective to streamline India’s complicated indirect taxation. Change is definitely never easy. While every small or large business entity is busy in complying with GST regime, HR professionals are also engaged in discussions to assess the effect of GST on their transactions with the employees under various categories.

Here are some of the teething troubles which are taking its own time and shape while implementing this unified tax system.

Gifts to employees

Every employer under its various program distributes gifts to their employees. In India, festivals like Diwali incur huge show of gifts for most companies’ workforce. Even in off sites, gifting T-Shirts, Bags and other items are common. Celebrating special days like birthdays, work anniversary, farewell, etc. is blended in the culture of every organization. With the advent of this new change, all of these gifts will now come under the gamut of GST.

GST will be applicable if the value of gifts increases INR 50,000 in a financial year. If the value of all gifts in the year is more than INR 50,000 then the GST is applicable on the amount above INR 50,000. However, if the amount of a single gift is more than INR 50,000, then GST will be applicable on the total amount of the single gift.

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Now, HR and the related department will have to start planning and tracking of various gifts of an individual employee in the financial year to ascertain the applicability of GST.

Free cab or subsidized facility

Many companies provide cab services to its employees at a subsidized rate to commute from home to workplace. If it is a part of the employment contract then it is not subjected to GST because it becomes a contractual liability of the company to provide the services.

However, if it is not a part of the employment agreement then it is considered as a supply by the employer to the employee which attracts GST. And in such a case, it will be taxed at 5% rate (similar to rent-a-cab) with no input tax credit. The company can later claim taxes paid on cab expenses as a credit when they provide services to employees at open market value.

It’s time for HR folks to explore new possible solutions to amend their contracts with transporters to reflect that cab services are being directly offered to employees. They may have to show and prove that the company is merely acting as a medium to recover invoices from employees on their behalf. This will safeguard the liability of GST on the company.

Provision of subsidized or free food

Food is offered either free or in subsidized prices to employees in their regular work day. In fact, some companies offer free lunches (only in the literal sense) to their employees too. Also, the majority of organizations have been providing delicious rewarding food on special days for celebrations like Diwali, Christmas, Women’s Day, New Year, etc. In all these cases too, GST will be applicable on the amount paid to outdoor caterers.

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However, the credit can be claimed by the company only if it can be treated as outward supply to employees at the open market price. Companies need to alter their existing contract by structuring it in a way that the caterer is supplying food directly to the employees and company is acting as a recovery entity of the invoice from the employees. This will help the company in safeguarding itself from such GST liabilities.

Notice pay recovery

Recovery of notice pay has always been a tricky area. Different companies follow different procedures. As per a recent report of PwC, notice pay recovery is an issue under current Service tax regime and may continue to remain an issue under GST regime. However, considering that the same appears from a contractual obligation, a position may be taken that no GST should be charged on the same. The company needs to appropriately word the same in their employment manual.

The good news is that, apart from the above employer to employee transactions where we can see a visible impact, there are other areas which are not covered under the purview of GST as of now. Given below are some of the transactions which remain unaffected by the new change.

  • Medical insurance
  • Health check facility
  • Company issued devices (laptop/mobile/tablet)
  • Mobile reimbursements
  • Relocation benefits
  • Personal accident insurance
  • Temporary accommodation
  • Mobile handset
  • Company car
  • Employee referral program
  • Long service award
  • House lease

Restructure and communicate

Whatever the case be, it has become necessary for HR to restructure some of the processes and transactions for GST compatibility. Not only this, HR and top executives must re-think the other often overlooked areas to further refine and simplify their existing process. And as a next step forward, it is imperative to effectively communicate all these changes to the stakeholders including all the employees in an unambiguous way. Repeated and crisp communication is the key to proper implementation of any new change in the system. Make all GST related communication transparent and help address these teething problems with utmost ease.

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