JANUARY 02, 2018

By Rajesh Shukla, CMA & Mukesh Dokania, CA

AS the maverick entrepreneur Richard Branson puts it very subtly, "Clients do not come first. Employees come first. If you take care of your employees, your employees will take care of your clients" . Over the years, organizations have developed various ways of rewarding their employees. These include ways and means, other than compensations, in the form of salary or bonus – as perquisites.

Although, in line with earlier service tax regime, Government has kept the services given by employee to employer, in the course of employment, out of the indirect tax net, however, enough confusion prevails around the treatment to be given to perquisites and other goods/services provided by employer to employee and also goods/services provided by employee to employer outside the employment contract.

Given the ambiguity surrounding the taxability of employee emoluments under GST, assigning a value to perquisites provided to employee and discharging appropriate tax liability by employer would be a major bone of contention and prone to litigation.

To examine GST treatment on employer-employee transactions, let us look into some of the important provisions of CGST Act, 2017:

Entry 1 of Schedule III of the CGST Act, 2017 - services by an employee to the employer in the course of or in relation to his employment are to be neither treated as supply of goods nor supply of services

Entry 2 of Schedule I (Activities to be treated as supply even if made without consideration) - supply of goods or services or both between related persons or between distinct persons as specified in Section 25, when made in the course or furtherance of business,

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Explanation to Section 15 - For the purposes of this Act,-

(a) Persons shall be deemed to be "related person" if-

(i) …

(ii) …

(iii) such persons are employer & employee;

(iv) …

(v) …

(vi) …

(vii) …

(viii) …

Entry 1(b) of Schedule II - any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of service.

Entry 4(b) of Schedule II (Activities to be treated as supply of goods or supply of services)- Transfer of business assets where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services.

From a conjoint reading of above provisions, one may agree that by virtue of employer-employee being treated as related party, any supply of goods/services by employer to employee even without consideration needs to be seen with magnifying glass so as to ensure that there is no non-compliance as well as to avoid any litigation or demand from authorities at later date.

With the above provision, question may come in the mind of employer, whether all facilities or perquisites given to employee like, canteen, employee transportation, laptop, mobile, data-card, perk car, corporate club membership facility, holiday home etc. will be treated as supply? Do our lawmakers really want employer to pay GST in addition to perquisite tax? If yes, valuation thereof?and how to observe the compliances like, issue of thousands of GST invoices to innumerable employees? and so on…

In this article, we have attempted to delve upon GST treatment required to be given on one of such employer-employee transaction related to perk / facility provided to employee in the form of car. Looking into the nature of transaction, it looks very simple and at first thought, it seems to be part of salary given in consideration of services given by employee to employer in the course of employment and not subject to GST.

Is the referred transaction so simple? The answer is a resounding NO. To understand the complexity of this transaction, let us ponder upon some of the relevant questions like, is the car capitalized in the books of the company? As per HR policy, is the employee allowed personal use of the car? If so, is there any way to identify that it is put to personal use? Is there any eligibility limit? Can employee pay differential amount and opt for higher version car beyond his/her eligibility limit? Is ITC available on insurance, repairs & maintenance of such car given as perk? What would be the GST treatment when ownership of car is transferred in the name of employee after specified period?

To answer all such questions, let us examine taxability of these transactions:

As per the HR policy, many employers allow employee to possess & use the car owned (either manufactured or purchased) by employer, subject to eligibility of employee & other conditions which inter-alia includes use for both personal & official purpose and is considered as "perquisites" under Income Tax while determining income under head "Income from Salary".

Employers are adopting various arrangements for giving a car to eligible employees viz; leasing arrangement, capitalization route etc. Let us now examine the GST implication on leased/capitalized vehicles given to employee under various scenarios as under:

i) Leased vehicle given to employee - Under this option, employer can take vehicle on lease from leasing company and give it to employee for further use as per perk car policy. Though leasing company will be eligible to claim ITC on vehicle, the GST applicable on lease charges will be equal to GST rate as applicable on goods i.e. GST applicable on vehicle taken on lease. As ITC on motor vehicles (other than for specified use) is blocked, the employer will not be able to take credit of GST charged by the leasing company on these perk cars taken on lease.

Further, in view of interest, administrative charges & margin of leasing company embedded in the lease rental, the cost benefit analysis should be done for lease vs. capitalization route, before finalizing modalities of giving perk car.

If the perk car issued to employee under this option is as per the employment contract and is part of CTC (within eligibility limit of employee), it will not be considered as supply of service in the hands of employer. The reliance can be placed on PIB release issued by MoFon date 10.07.2017.

ii) Capitalized vehicle (Purchased from Dealer) given to employee within eligibility limit : Under this option, employer would have paid GST at the time of procuring the vehicles. ITC on motor vehicles (other than those used for specified purpose) is blocked under Section 17(5) of CGST Act, 2017. In our view, there is no additional GST implication at the time of issue of cars to employee for official & personal use as per HR policy since being part of CTC of employee, as explained in para (i) above.

One more dilemma may arise on applicability of GST to be paid at the time of capitalization of vehicle, if employer is manufacturer of vehicle/car, which is being given to its own employee.

iii) Capitalized vehicle given to employees beyond his eligibility limit & differential amount is recovered from employee: Under this option, employer capitalizes the vehicle to the extent of eligibility limit of employee and the amount recovered is not capitalized. For example, if the value of vehicle is Rs. 15 lakhs & the eligibility of employee is Rs. 10 lakhs, the vehicle is capitalized to the extent of Rs. 10 lakhs & differential amount of Rs. 5 lakhs is recovered from employee.

Before, determining the applicability of GST on amount recovered from the employee, let us go through entry 1(b) of Schedule II of the CGST Act, 2017 which is reproduced as under:

"any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of service"

In view of the above provision, when the employee opts for vehicle owned by the employer and pays the differential amount in excess of his eligibility limit and the car is earmarked& issued to him, the employee acquires a right in an undivided share of the vehicle and it could be treated as a supply of service under clause 1(b) of Schedule II thereby subjecting it to GST.

Now, a question arises, isn't the above treatment amounting to double taxation to the extent of GST charged on recovery made from employee, over and above his eligibility limit. The answer is yes.

To avoid double taxation, a view may be taken that, since transaction of recovery of differential amount towards transfer of undivided share in goods without transfer of title thereof, is a supply, restriction put under Section 17(5) on admissibility of ITC on motor vehicles (except for use for specified purpose) shall not be applicable and employer can avail proportionate ITC attributable to undivided share in the vehicle transferred to employee . However, this viewpoint is not free from doubt and has its own practical difficulties. Views are also going around that, as the vehicle shall be finally sold to employee after period specified in HR policy, although at reduced rate, the entire ITC on the first instance itself will be available to employer, but in the view of the authors this may be very aggressive position and may not stand scrutiny of law, in case of litigation.

iv) Flexi pay scheme - To avoid the above additional tax burden / double incidence of tax on recovery made from employee, employer may offer flexi-pay scheme to its employee wherein employee is given option to design his/her salary structure. Under this option, employee has flexibility to adjust his/her salary from one head to another while keeping Cost to Company (CTC) component at same level. One care that needs to be taken under this option is the adjustment made to CTC to the extent of Flexi-pay against higher eligibility, should be of equal to the tenure of perk car period and not less than it. It should also be recorded in the Compensation letter issued to the employee concerned. In view of benefit of reduction of additional burden of GST in a situation where employee opts for higher value car as discussed in (iii) above, employer-employee may leverage this option to do proper GST planning within the legal framework.

While we have discussed taxability of perk car and ITC thereof, now let us evaluate tax treatment/ITC admissibility on ancillary transaction associated with these perk cars viz; insurance, repairs & maintenance of perk car, spare parts, tyres etc. provided by employer to employee etc.

a) ITC on insurance, repairs & maintenance of perk car :- Since, there is no specific entry in GST law to specifically restrict ITC on insurance, repairs & maintenance of perk car, one thought process which is floating around is that since Section 17(5)(a) of CGST Act is restricting ITC on only motor vehicles and not on repairs & maintenance of motor vehicles, ITC on insurance, repairs & maintenance of motor vehicle given as a perk car to employee shall be available to the employer.

In view of authors, this stand is not free from doubt and there is every possibility that authorities may raise dispute if any employer takes the above stand. The view of authors is based on following provisions related to ITC:

i) Since Section 17(5)(a) has categorically restricted ITC on motor vehicles, in our view, when the principal asset itself is not eligible for ITC, restriction of ITC put on motor vehicle will automatically flow to insurance, repair, maintenance etc. of the motor vehicle.

ii) There is another entry in Section 17(5)(g) restricting ITC on "goods or services or both used for personal consumption" , and if someone does not agree with the reasons adduced in sl. no. (i) above, they will agree that there is an element of personal consumption in the perk car (along with insurance, repairs, maintenance) given to employee and, therefore, if the ITC is not blocked in Section 17(5)(a) then definitely same will be blocked under Section 17(5)(g).

Under this entry,a view may be taken that since perk car is used for both official & personal use, ITC, if at all inadmissible should be restricted to personal use. If this view is taken, how to determine the value of personal use is another challenge, since GST law does not prescribe clarity on many of such issues.

b) Applicability of GST, in case employer issues tyres or spare parts from the stock for repair/maintenance of vehicles:- In some cases, if employer is OEM / manufacturer of vehicles, to pass on benefit of discounted purchase price of tyres/ other spares, they may issue these items to employee for repair/ maintenance of vehicles. In such situation, a question may arise as to how to handle tax treatment in the hands of OEM/ Employer. Should OEM only surrender GST credit availed on these items or by virtue of employer-employee relationship, OEM / employer will have to determine OMV of these items and discharge GST on OMV of such items issued by employer for repair/maintenance of perk car.

One more aspect, which needs to be dealt by employer is final disposal / transfer of ownership of cars after tenure, as per perk car policy. If as per HR policy, employee has to compulsorily buy back the car after certain period of use, then one needs to ascertain GST treatment to this transaction.

Since, perk car had already suffered tax at the first instance when the same was purchased / capitalized at the time of allotment to employee, whether GST will be applicable again at the time of transfer of ownership to employees, if some nominal consideration is recovered? Unfortunately the answer is yes.

One more complication in this regard is, although, at the time of buyback of car by the employee, employer is recovering a nominal amount (mainly calculated on WDV basis considering life of vehicle as 4-5 years), by virtue of employer-employee being ‘related person', GST liability needs to be discharged on Open Market Value (OMV).

Now, since, in case of these used vehicles, OMV may be much higher than the actual amount realized from the employee (at WDV/reduced value), and if employee is charged GST on OMV, an employee may think twice before buying the vehicle and he/she may look for various avenues viz. surrender of car with employer, requesting employer to sell the vehicle to their relative/friend etc.

One more complication will arise to determine OMV if employee has already paid partial amount over & above his eligibility limit in advance, as mentioned above.

If the HR policy permits the employee to surrender the car with his employer, then definitely there would not be any additional GST burden on the employee.

But what would be the GST implication, if employee has to compulsorily buyback the vehicle or if the policy allows him to sell the vehicle to friends/relatives of the employee.

As explained above, in case employee is buying the car in his name, GST has to be paid on OMV, but in case the vehicle is sold to relative / friend of employee, referred by him, can employer avoid establishing OMV is also a moot question. Though, the definition of family under Section 2(49) will not cover family member / friend of employee as related person of employer, such transactions will definitely be seen by authorities as collusion between employer-employee to avoid payment of GST on OMV. Robust documentation needs to be kept by employer on record to prove OMV in such case and prove that value at which GST is discharged by employer is equal to or not less than OMV.

From the above discussion, it is clear that this area is likely to see a lot of litigation under the GST law, to the utter delight of Advocates and Consultants. The very process of determining the employer's liability could be onerous requiring a workable knowledge of accounting, provision of personal income tax and employment policies apart from GST law and it would seem that most companies are ill-equipped to handle this challenge, especially, with regard to valuation of these supplies.

We understand that already lot of representations have been made on Employer-employee transactions, including deleting the provision to treat the employer and employee as "related parties" and also following simple principle that once ITC is denied / blocked at first instance to employer, no GST treatment is required for providing these cars to employees / subsequent transfer of ownership to employee / any third party. This would be in the spirit of GST as well as bring ease of doing business, which is much talked but less practiced.

Hopefully, the CBEC would come out with a clarification and if need be redress the issue in the ensuing Union Budget 2018.

(The views expressed are strictly personal.)