JANUARY 29, 2020

By Vijay Kumar

IT can be safely assumed that the salary paid to an employee is not liable to GST either in the hands of the employee or employer. It can only be assumed, as there is no final word in tax laws. The Government would like to assume that all taxpayers are guilty of some evasion offence until proved innocent beyond a shadow of doubt.

This is fine as long as the employer and employee are at the best of terms with each other. But what happens when an employee is sacked or quits. When an employee is shown the door without a notice, normally he is given three months salary in lieu of notice. Similarly, if the employee quits without giving the normal notice, he is made to pay the employer three months salary. Is this notice pay subject to GST? This is a legacy dispute carried forward from the earlier Service Tax regime.

In the Service Tax Education Guide Para 2.9.3, the CBEC clarified:

2.9.3 Would amounts received by an employee from the employer on premature termination of contract of employment be chargeable to service tax?

No. Such amounts paid by the employer to the employee for premature termination of a contract of employment are treatable as amounts paid in relation to services provided by the employee to the employer in the course of employment. Hence, amounts so paid would not be chargeable to service tax. However any amount paid for not joining a competing business would be liable to be taxed being paid for providing the service of forbearance to act.

Is the converse true? That is whether the amounts paid by the employee to the employer for quitting the job without notice, liable to Service Tax/GST?

Recently, the Madras High Court held that it is not taxable as far as Service Tax is concerned. - 2020-TIOL-183-HC-MAD-ST

According to the Revenue, payment in lieu of notice constitutes payment to an employee by the employer for the notice period or vice versa where the employer/employee desires an immediate exit from the organization. This arrangement, the Revenue argued, would attract the provisions of Section 66E(e), whereby agreement by an entity to the obligation to refrain from an Act or to tolerate an Act or a situation, would constitute taxable service. According to the Revenue, the petitioner has tolerated the act of immediate quitting from service, by the employees and such agreement/toleration results in the rendition of a taxable service.

The High Court observed,

The query raised relates to a contra situation, one, where amounts have been received by an employee from the employer by reason of premature termination of contract of employment, and the taxability thereof. The Board has answered in the negative, pointing out that such amounts would not be related to the rendition of service. Equally, so in my view, the employer cannot be said to have rendered any service per se much less a taxable service and has merely facilitated the exit of the employee upon imposition of a cost upon him for the sudden exit. The definition in clause (e) of Section 66E is not attracted to the scenario before me as, in my considered view, the employer has not 'tolerated' any act of the employee but has permitted a sudden exit upon being compensated by the employee in this regard.

Notice pay, in lieu of sudden termination however, does not give rise to the rendition of service either by the employer or the employee.

Will it apply mutatis mutandis to GST? Even tax experts (whose tribe has multiplied in geometric progression after the advent of GST) are divided on this issue, while the government which was keen to collect service tax would be keener to collect GST, especially when you know the collections are not something to trumpet about. If the government by any chance has a view that this is not taxable, can't they issue a clarification or should we wait for the Supreme Court?

PS: The Madras High Court in the case mentioned above - 2020-TIOL-183-HC-MAD-ST extracted the Service Tax Education Guide Para 2.9.3 as:

2.9.3. Would amounts received by an employee from the employer on premature termination of contract of employment be chargeable to service tax?

No. such amounts paid by the employer to the employee for premature termination of a contract of employment are treatable as amounts paid in relation to services provided by the employee to the employer in the course of employment. Hence, amounts so paid would be chargeable to service tax. However any amount paid for not joining a competing business would be liable to be taxed being paid for providing the service of forbearance to act.

Do you find something missing?

Summon a Third Party and attach his bank account - GST at its simplified best.

The Bombay High Court had an interesting case recently.- 2020-TIOL-151-HC-MUM-GST

The Directorate General of GST Intelligence issued a summons to the Petitioner on 22 October 2019 to attend on 5 November 2019, referring to inquiry against some other Company. The summons stated that the authorities had reason to believe that the Petitioner had facts and documents material for the inquiry. The Petitioner was summoned under section 70 of the CGST Act to give evidence and produce documents in the office of the Directorate General of GST Intelligence. On the same day, the Directorate General issued a communication to the State Bank of India informing the Bank Manager of proceedings being initiated against the Petitioner and a provisional attachment of bank account is necessary under section 83 of the CGST Act. Accordingly, the Bank Manager was directed that no debit be allowed to be made from the said account or any other account operated by the Petitioner. The Petitioner received a communication from the State Bank of India on 5 November 2019 regarding attachment by the Respondent- Authorities. Challenging this action of attachment under Section 83 of the Act, the Petitioner has moved the present Petition.

The Government's counsel argued that:

The power of provisional attachment is conferred to protect interests of Revenue, and this was a fit case where this power had to be exercised. Investigation is in progress. Money trail is traced to the Petitioner and inquiry is under way. The language of section 83 indicates that during the pendency of any proceedings (in this case under section 67 of the Act) if a summons is issued under section 70 to further the inquiry to other taxable persons provisional attachment of bank account of other taxable persons also is permissible and contemplated. 

The High Court observed,

Power to provisionally attach bank accounts is a drastic power. Considering the consequences that ensue from provisional attachment of bank accounts, the Courts have repeatedly emphasized that this power is not to be routinely exercised. Under Section 83, the legislature has no doubt conferred power on the authorities to provisionally attach bank accounts to safeguard government revenue, but the same is within well-defined ambit. Only upon contingencies provided therein that the power under section 83 can be exercised. This power is to be used in only limited circumstances and it is not an omnibus power.

It is therefore not possible to accept the submission of the Respondents that even though specified proceedings have been launched against one taxable person, bank account of another taxable person can be provisionally attached merely based on the summons issued under section 70 to him.

Because the officers have no understanding of a businessman's requirement of cash for running his business, such throttling takes place. Just because you assume you have the power, if you go round freezing bank accounts, are you not doing irreparable damage not only to business, but to the very mission of collecting tax? How many taxpayers are made to frantically run to High Courts, just to keep themselves afloat against the onslaught of these very committed officers?

Customs Classification Expert gets Presidential Award

Fourteen years ago I wrote in TIOL-DDT 292

On January 26th 2005, while most of the officers were busy in discussing this year's Presidential Award winners, yet another list of prize winners was announced - not by the Indian Government, but by the World Customs Organization. Recently WCO conducted an online competition on the occasion of the release of its new e-learning course. The participants had to answer the questions on HS and classification of goods. The results were declared on 26th January, International Customs Day. Mr  JM Kishore  an Appraiser in Vizag Custom House secured sixth place in this International event. In the top ten, Mr Kishore was the sole representative of Indian Customs. There are many talented officers like Mr Kishore in Indian Customs and Excise department, but their efforts are best recognised outside than within the Department. Customs officers and others from all over the world participated in this exciting competition and it is really a matter of pride that Mr Kishore is the only Indian Customs officer who made it to the top ten. Kishore though hardly known outside his Vizag Customs is a brilliant officer whose command over classification is now confirmed by the WCO in this competition. He got 90% marks in the test on customs classification. Obviously we have a classification expert languishing in a small Custom House like Vizag and we are generally not ready to recognize our own talent until some foreign body does the job. Now that he has won the WCO prize, the Indian Customs should recognize him with some rare honour. Give him a promotion, at least a few increments. The least the department can do is to invite him to all those tariff conferences. Kishore is also a good writer of incisive articles and had several articles published on this site. DDT congratulates him on this great feat and wishes him all the best.

Fourteen years later, I am happy to report that Kishore, who is now a Joint Commissioner has been conferred the Presidential award this year. Talent does get recognised, maybe a little late.

Until next week