Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: ACCOUNTING STANDARD :: cpt :: articles on VAT and GST in India :: ARTICLES ON INPUT TAX CREDIT IN VAT :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: Central Excise rule to resale the machines to a new company :: list of goods taxed at 4% :: VAT Audit :: form 3cd :: TAX RATES - GOODS TAXABLE @ 4% :: TDS :: due date for vat payment :: ACCOUNTING STANDARDS :: empanelment :: VAT RATES
 
 
« Service Tax »
 GST on a knife-edge as states act tough
 Parliament Winter Session: Govt keen on proper discussion on GST Bills
 Service Tax revision to make digital content expensive: Here’s how it will impact you
 GST Council may reduce tax slabs in future: CBEC chief
 Govt to waive service tax on card transactions up to Rs 2,000
 Recovery Of Tax Under Model Gst Law
 Income Tax officials hunt for Mumbai’s ‘ghost’ assessee
 GST delay to impact Budget
 If GST not rolled out by Sept, there won't be taxation in country, warns Jaitley
 India’s E-Service Tax Will Add To Foreign Content Providers’ Woes
 GST Council to discuss model laws, tax jurisdiction today

Service tax applicability on Short notice recovery
February, 04th 2015
Service tax applicability on Short notice recovery
By: Sushanth Karanth
February 4, 2015

Introduction

In the present day corporate world, an employee is expected to possess challenging skill sets to perform the duties expected as per his job profile due to which there is a high demand for talented human resource. Employees generally opt to change jobs from the existing company to the new company in pursuit of better prospects but, before shifting over to the new company one has to serve notice period for a period of two to three months,as per the prevailing practice in the industry.

Concept of Short notice recovery

An employee is expected to give a notice to the company, at least two to three months before quitting the job and shall continue to work in the same role till completion of such period and this period is called as notice period.In case of employee not serving the mandated notice period, the company could rightfully recover an amount called as short notice period recovery as per the company’s policy or terms of employment contract.

We shall examine, whether service tax is applicable / payable by company on amount collected towards short notice recovery from the parting employees in this article.

Services in course of employment

Under the negative list based taxation,all the services covered under the definition of service w.e.f July 2012 shall be taxable, except the services listed in Negative list or services exempted vide mega exemption notification.

As per Section 65B (44), definition of service reads as under:

“Service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include;

  1. …………………………..
  2. a provision of service by an employee to the employer in the course of or in relation to his employment;

In other words, the service provided by employee to employer in course of employment is excluded from service tax levy.

Service tax implication on short notice recovery

Now it is clear that, there is no exclusion or exemption to the services provided by employer to employee. The same is also not covered in the exclusion limb of the service definition either and covers declared services in the definition of service, and declared services,as per section 66E (e) sets out as under:

‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’

Companies collect money from the resigning employees for tolerating early termination from the employment, without serving notice period and such receipts could be liable to service tax in the hands of company, at the limb-…………..to tolerate an act or a situation and service tax could be demanded.

At same time, it should not be lost sight that under negative list based taxation, the Service tax levy is an activity tax. Service tax is leviable on service being ‘any activity’ for a consideration. Though the company is receiving a consideration, there is no activity done by company to the employee in exchange for consideration of notice period recovery. A view is possible that the fundamental premise of ‘activity for a consideration’ itself is not satisfied,in which case the Service tax levy may not be applicable.

Even though it is not liable, as of date there is no clarification/circular clarifying non applicability of service tax on notice period recovery, erring on caution the service tax could be decided to be paid by the company as under.

Whether service tax can be collected from the employee?

As per Section 68(1), service tax is payable by the provider of taxable services, except in some specified instances where the service receiver is liable. As service tax is destination based levy the service tax could also be collected from the service receiver and paid to Government by the service provider. This view was also held in All India Federation of Tax Practitionersand othersv/s Union of India 2007 (8) TMI 1 - Supreme Court

An employer, who is recovering amount towards short notice, could collect and pay the service tax at 12.36% from the employee. As a tax planning, company could insert a clause in the employment agreement, stating that service tax payable extra by employee as applicable. If company does not collect service tax extra.

If company does not collect extra service tax, then it shall bear the service tax out of pocket by calculating the service tax on inclusive basis as per Sec 67(2) of the Act.

An illustration is provided below for the benefit of readers for clear understanding of the concept.

Illustration:

Mr. Vijay, a professional software programmer, employed in M/s ABC Software Pvt Ltd having an experience of 2 years, drawing a salary ₹ 75,000 p.m. and wish to leave the company as he has got some better opportunity elsewhere. So he decides to leave M/s ABC and as per the terms of employment he shall serve notice period for a period of 3 months. Compute the amount of service tax payable by the company.

Solution:

In the given case assuming that Mr. Vijay has served only one month of notice period and did not serve other two months and agreed to pay off his short notice.

Situation 1:

No separate clause in the employment agreement, with respect to service tax and the company did not collect service tax from Mr. Vijay.

Amount received as short notice recovery for 2 months

Rs.1,50,000 (Rs.75,000 * 2 months)

Service tax included in ₹ 1,50,000

Rs.16,501 (Rs. 150,000*12.36/112.36)

Therefore in the current situation M/s ABC shall pay a service tax of ₹ 16,501 from this receipt.

Situation 2:

A separate clause in the employment agreement is inserted saying ‘that the amount recovered would be in addition to the applicable service tax’

Amount received as short notice recovery for 2 months

Rs.1,50,000 (Rs.75,000 * 2 months)

Service tax on in ₹ 1,50,000

Rs.18,540 (Rs. 150,000 * 12.36%)

Therefore in the current situation M/s ABC shall pay a service tax of ₹ 18,540 from this receipt, which shall be collected from the Employee.

Conclusion

Though there is no activity of service, there is a flow of consideration from employee to employer and also at present there is no clarity in the law. Since, service tax law is new and developing with grey areas, erring on caution the recovery towards short notice could be levied to service tax and it is advisable to remit service tax by the employer either by collecting it from the employee or shall be paid by employer by calculating service tax on inclusive basis as illustrated above.

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Software Reengineering Software Re-engineering Software Reverse Engineering Software Reverse Development Software Change Modulation Software Conversion Software Re-creation Software Re-development

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions