Premium recovery from employees’ parents mediclaim not liable for GST, rules AAR

A Goods and Services Tax (GST) ruling has held that recovery of medical insurance premium from salary of employees for parents’ Mediclaim would not be liable to GST. This decision will benefit the salaried class.

The ruling was given recently by the Maharashtra Authority for Advance Ruling (AAR). Although such rulings do not have precedent value like that of a High Court or Supreme Court verdict, it can be used as a persuasive tool in similar matters. Such rulings are binding on the applicant and jurisdictional tax officers.

Mumbai-based Jotun India Private Ltd (‘Applicant’) had approached AAR for a ruling on applicability of GST on premium recovered from employees. The applicant introduced parental insurance for employees’ parents as an optional scheme where the company initially pays the entire premium along with taxes to the insurance company.

Later half of the premium was to be recovered from the employees opting for the scheme. Now, the applicant wanted to know whether GST is payable on recovery of 50 per cent the insurance premium from the salary of the employees. It is clear that the applicant is not providing any services to its employees but just recovering half of the premium for the services rendered by the insurance company.

The law says that services by an employee to employer is the course of or in relation to his employment are not treated as a supply of services. However, since the applicant recovers certain amount from its employees against the insurance premium, doubt is raised on whether the same will result in ‘supply of service’ and GST will be required to be paid on the same.

The law specifies the activities or transactions, that are treated neither as a ‘Supply of Goods’ or a ‘Supply of Services.’ Apart from services by an employee to the employer, the list includes services by any court or tribunal, functions performed by MPs/MLA/Municipality Councillors/Members of local authorities, duties performed by Constitutional authorities, duties performed by Chairman or Members of the Committees set up by Centre or States and services of funeral/burial/crematorium/mortuary including transportation of dead bodies.

After hearing the arguments, the AAR said that the applicant is not in the business of providing insurance services. Since, there is no statutory requirement of providing parental insurance cover for the employees’ parents; the non-provision of the same would not affect the business of the applicant. Thus, the activity of recovery of 50 per cent of the cost of insurance premium cannot be treated as an activity done in the course of business or furtherance of business.

Further, the activity of providing mediclaim policy for the employees’ parents does not satisfy the condition prescribed in the law required to be held as ‘supply of services’ and it is not covered under the term ‘business’ as defined in the law. Accordingly, the AAR ruled that said the activity cannot be treated as supply of services between an employer and an employee.

According to Harpreet Singh, Partner in KPMG, this is an important ruling which has gone into the essence of the transaction. Any revenue cannot be held to be liable to GST unless the same is towards a supply and the activity has been done in the course or furtherance of business. “However, it would be interesting to see if this ruling can be applied to all recovery made from employees,” he said.

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