No GST on notice pay recovery

Shishir Sinha | | Updated on: Aug 04, 2022

Cancellation fee for hotel booking, train or air tickets to attract GST

Notice pay recovery will not attract GST. However, cancellation fee for hotels booking, airline or train ticket, etc will be taxed at the same GST rate as would be applicable to the principal service.

Acting on the recommendations of the GST Council, Finance Ministry has come out with a detailed circular. Experts feel this circular will bring lot of clarity on applicability of GST on liquidated damages, compensation and penalty arising out of breach of contract or other provisions of law.

Notice pay recovery

The circular said forfeiture of salary or recovery of bond amount in the event of the employee leaving the employment before the minimum agreed period by the employer is not “a consideration for tolerating the act of such premature quitting of employment but as penalties for dissuading the non-serious employees from taking up employment and to discourage and deter such a situation.

Further, the employee does not get anything in return from the employer against payment of such amounts. “Such amounts recovered by the employer are not taxable,” it said.

Harpreet Singh, Partner with KPMG in India, said recovery from employees on non-serving of notice period is a common phenomenon across multinationals. “ In a way, this circular emphasises the distinction between ‘condition of a contract’ vis-à-vis ‘consideration of a contract’. Payment by one to another pursuant to condition of a contract may not necessarily result in separate GST liability,” he said.

Cancellation charge

Service providers such as hotel accommodation, tour and travel, transportation, etc should provide the cancellation within a certain time period on payment of fee. It can be considered as the charges for the costs involved in making arrangements for the intended supply and the costs involved in cancellation of the supply, such as in cancellation of reserved tickets by the Indian Railways.

For example, cancellation charges of railway tickets for a class would attract GST at the same rate as applicable to the of travel (i.e., 5 per cent GST on first class or air-conditioned coach ticket and nil for other classes such as second sleeper class). Same is the case for air travel.

The circular also made it clear that late payment surcharge/fee on bills for electricity, water, telecommunication services, etc would be assessed as the principal supply. This means if rate of GST is 18 per cent on mobile service, late fee for such service will have the same rate.

Saurabh Agarwal, Tax Partner, EY, said the CBIC has issued clarifications on various burning issues faced by the industry viz levy of tax/rate of tax on various goods and services. The circular also addresses the key issues around liquidated damages, penalty on cheque bouncing, delayed payment charges, recovery from employees towards bond payment/forfeiture of salary, etc. In many of these cases, the circular would help avoiding litigation between the department and the taxpayers,” he said. 

Published on August 04, 2022
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