Quitting without serving notice period? You will now have to pay GST on salary in lieu of notice

According to the latest AAR ruling, employees are liable to pay GST on salary in lieu of notice.

New Delhi: An Advance Authority of Advance Ruling (AAR) has ruled that Goods and Service Tax (GST) is applicable on various employee recoveries. According to the latest ruling, the tax will be applicable on notice pay, group insurance and telephone bill. 

The AAR was hearing a case related to Bharat Oman Refineries, a subsidiary of state-owned Bharat Petroleum. With the latest ruling, the AAR has clarified that the employee is liable to pay GST on salaries received for the notice period. 

According to a report by Economic Times, the AAR pointed that the company is "providing a service" to an employee in the case of notice pay, and that’s why GST should be applied on such transactions. 

The AAR also reportedly noted that tax is chargeable on activity viewed as a supply of service under the GST framework. The supply of service could be direct or deemed supply, ET reported. 

The crucial AAR ruling has come at a time when all major companies are faced with high attrition rates, as employees keep switching firms in hopes of a better package and benefits. 

The ruling, which has made clear that GST will be applicable on notice pay, will also invite more scruitnity from the taxman, who will now have better clarity with the issue. Also Read: Tega Industries IPO: Check GMP, price band, subscription status, and should you invest?

In July 2020, the Gujarat Authority of Advanced Ruling had also passed a similar order wherein it directed Amneal Pharmaceuticals Pvt Ltd, Ahmedabad, to pay GST at 18 per cent under “services not elsewhere classified” for recovering of notice pay from employees leaving the firm without completing notice period. Also Read: Nykaa aspires for significant offline presence after a glowing stock market debut