The Government has clarified that perquisites provided by the employer to the employee in terms of a contractual agreement will not attract Goods & Services Tax (GST). However, experts feel that such a clarification will not end the confusion.
Perquisites could include free membership of a club, health and fitness centre, free housing, car with driver, and so on. The Central Board of Indirect Taxes & Custom (CBIC) had, in a press release dated July 10, 2017, said services provided by an employee to the employer in relation to his employment are outside the scope of GST (neither supply of goods or supply of services). It follows that supply by the employer to the employee in terms of a contractual agreement entered into between the employer and the employee will not be subject to GST.
Still, some companies alleged that in practice, tax officers never follow this direction. Further, there have been multiple rulings on this issue from AAR (the Authority for Advance Rulings) holding that it is taxable. The Haryana AAAR (Appellate Authority for Advance Rulings) said such transactions are taxable. All these necessitated a clarification.
Now, a circular issued by the Finance Ministry says the CGST Act provides that “services by an employee to the employer in the course of or in relation to his employment” will not be considered as supply of goods or services and, hence, GST is not applicable on services rendered by an employee to an employer, provided they are in the course of or in relation to employment.
“Any perquisites provided by the employer to its employees in terms of a contractual agreement are in lieu of the services provided by the employee to the employer in relation to his employment. It follows that perquisites provided by the employer to the employee in terms of a contractual agreement entered into between the employer and the employee will not be subjected to GST, when the same is provided in terms of the contract between the employer and employee,” the circular said
What consitutes ‘gift’ or ‘perk’
However, experts remain sceptical about whether this will be followed in practice. According to Smita Singh, Partner (Indirect Tax, Customs & Trade) with S&A Law Offices, no clarity has been granted in terms of what constitutes ‘gift’ or ‘perquisites’. The circular provides that where such perquisites are expressly mentioned in the contract, the same wouldn’t be subject to GST. However, for benefits provided by employers that are not expressly mentioned in the employment contracts, the confusion whether it would be leviable to GST or not, still persists in the absence of its definition. Further “ no clarification has been provided with regard to allocating a value to perquisites provided to the employee for discharging appropriate tax liability. Such issues are highly contentious in nature and are prone to litigation,” she said.
Rajat Mohan, Senior Partner with AMRG, said perks like rent-free accommodation, a personal insurance policy, transport facility, and motor car facility provided to an employee under an employment agreement are tax neutral since 2017. “This clarification would save tax cost and make all such perquisites cheaper for employees. However, this circular fails to address issues related to the eligibility of ITC on procurements made by businesses that are used to provide such tax-free perquisites,” he said.