JUNE 29, 2017

By MK Gupta

The purpose of this article is to examine the liability of GST on 'salary sacrifice'. Presently it is common practice in corporate sector to provide a package of benefits for employee as part of the remuneration package. These benefits include providing laptop, mobile phone, software packages, childcare voucher, car, house, and vouchers to get goods or services. These benefits are provided in lieu of some part of salary being sacrificed by employee.

GST is chargeable on supply of goods or services on the value and is payable by a taxable person. Supply is defined as various transactions made or agreed to be made for a consideration by a person in the course or furtherance of business. To term a transaction as supply, twin test of consideration and business must be satisfied. Business includes any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit. Any transfer of the title in goods is a supply of goods. If there is no transfer of the title in goods, it is a supply of services. For the goods and services used for the purposes of furtherance of business, the taxable person is entitled to input tax credit.

It is proposed to examine the issue from two aspects. First, the taxable person has taken input credit on inputs i.e. on goods or services. Second, the taxable person has not taken any input tax credit or input tax credit is statutorily blocked.

Input tax credit is allowed on supply of goods or services which are used or intended to be used in furtherance of business. Once the credit is taken, goods or services become part of the business assets. They can be used for business purposes only. Permanent transfer or disposal of Goods forming part of business assets even without consideration is deemed to be supply of goods if input tax credit has been taken. Thus, if there are any goods on which credit has been taken and they are given to staff even without consideration it will attract GST. Exception is there for supply of goods of certain value to employees as gifts. Once the input tax credit is taken on goods to be used in business, their further supply to any person will be in furtherance of business only.

In the case of Astra Zeneca UK Ltd v HMRC, ECJ (Case C-40/09) held that the provisions of a retail vouchers by a company, which acquired that voucher at a price including VAT, to its employees in exchange for giving up part of their salary constituted a supply of services effected for consideration. In this case the company was taking input tax credit on vouchers.

Coming to the second situation where the taxable person has not taken any input credit outright or it is barred by law. For example, input credit on cars is not allowed. Input tax credit is allowed on goods or services used or intended to be used in furtherance of business. If the inputs on which credit has not been taken, further supply to anybody shall be deemed to be not in furtherance of business and, therefore, shall be a non-taxable supply.

If the credit is barred by law as in the case of car, the question is whether supply of car to employees in lieu of salary sacrifice will be taxable . It is felt that it should not attract GST as the law provides that any permanent transfer or disposal of goods even without consideration is supply of goods if input tax credit has been taken. It means if input tax credit has not been taken, any disposal would not be supply in the course or furtherance of business. In UK, if the input tax credit is blocked, no output tax is payable. In this regard legal provisions are not clear in GST. To maintain fiscal neutrality which is the hallmark of VAT system, the government should clarify that no GST will be payable on further supply of business assets if input tax credit is not taken.

Questions are being raised whether GST would be payable on goods or services which are being provided in terms of contracts entered prior to GST. Let us examine the case of exclusive use of car being allowed to an employee as a part of salary package. Post GST treatment will depend on the fact how the car has been acquired by employer. If the car has been purchased outright and no credit of excise duty or VAT has been taken, GST would not be attracted. If the car has been acquired on financial lease, there was service tax liability on certain interest portion of the lease rental. On such transaction it is felt no GST liability would be there as interest income is exempted. Hence, if car taken under financial leasing is allowed to be used by an employee, no GST. If the car has been acquired under operating lease, lease rental was liable to VAT and the employer could claim lease rental including VAT as revenue expenditure. In GST, acquisition of car taken prior to GST under operating lease would be considered as supply of service and, therefore, GST would be payable. There appears to no bar of taking input tax credit under GST, however, the GST rate on such supply of service would be equal to that applicable to car. If the input tax credit is taken, GST will be payable on use of such car by employee. If the input tax credit is not taken, it is felt no GST shall be payable. GST paid on lease rental in such a situation would be a cost to the business but there would be some relief in income tax as it can be claimed as revenue expenditure.

From the above analysis it appears that confusion prevails on liability of GST on such supplies as there is no clear statement of law providing that no output tax, if input credit tax is not taken. If output tax is charged on supplies where no input tax credit is taken/allowed, it will be against the spirit of fiscal neutrality which is the heart and soul of VAT/GST.

(The author is IRS(Retd), Former Vice Chairman Settlement Commission; DG Audit CBEC and the views expressed are strictly personal.)