Here is a look at the impact the goods and services taxes will have on businesses under an employer-employee scenario as well as on investment by NRIs or expatriates
India ushered in the biggest post-independence tax reform with euphoria coupled with anxiety.
It remains to be seen what impact the Goods and Services Tax (GST) will have on the Indian economy in the long run.
While much has been said and written about its impact on corporate entities, it would be interesting to look at key areas for consideration during the course of business under an employer-employee scenario.
GST is levied as a tax on supply of goods or services. Thus, the question arises whether GST can be levied on the provision of services by an employee to the employer. The GST law provides a specific exclusion of services rendered by an employee to an employer in the course of or in relation to his employment.
Interestingly, supply of goods or services, or both, by a related party without consideration and made only in the course or furtherance of business is subjected to GST and an employee is deemed to be a related party of the employer.
As a consequence, an issue has arisen as to whether gifts and perquisites provided free of charge by an employer to an employee can be subjected to GST.
The ministry of finance, in a statement dated 10 July, clarified that gifts of value exceeding Rs50,000 made without consideration is subject to GST when made in the course or furtherance of business.
‘Gift’ has been defined as one made without consideration, voluntary in nature, and made occasionally.
Further, it cannot be demanded as a matter of right by the employee and a court of law cannot be approached for obtaining a gift. Additionally, the statement clarified that no GST would be levied in case perquisites are provided free of charge to all employees, subject to the condition that the employer eventually pays appropriate GST.
The principle would remain in case of free housing provided to employees as part of an employment contract and forms part of cost-to-company (CTC).
In view of the clarification, the possible view is that the perquisites forming part of an employment contract are likely to remain outside the purview of GST.
However, the inclusion of perquisites as a part of an employee’s contract is likely to have income-tax implications to be borne by the employee.
The government’s effort to quickly address the issue emanating from the implementation of GST is laudable. However, the rationale of levying GST on gifts of more than Rs50,000 to employees is still questionable as any transaction between employer and employee should be considered as in the course of or in relation to his employment.
This is further exemplified by the fact that such a gift is taxed in the hands of the employee as a perquisite. Thus, while GST is one of India’s boldest tax reforms, one hopes that a hurried implementation does not curtail its potential to provide larger benefits to society.