Early exit pay of the employees under taxman’s scrutiny

According to the people that I know, the scrutiny is currently focused on transactions where the payment is at least Rs 30 lakh. Early exit pay has attracted taxman’s attention, it means where an employee pays money to his employer for not serving a full notice period.
The indirect tax department is searching transactions of all major information technology (IT) and information technology enabled services (ITeS) companies where employees paid money for quitting on the grounds that such transactions could be taxable. Some companies have been issued letters cautioning them that GST of 18% should be levied on early exit pay.
More has been learnt that Apple, Google, Oracle, TCS, Infosys, Wipro, HP, HCL and Microsoft have received these letters and these companies have been asked to treat the payments as taxable.

“These transactions shouldn’t attract GST”, some legal experts opined.

Abhishek A Rastogi, partner at Khaitan & Co. said, “The authorities may have an apprehension that these activities would fall within the gamut of refraining acts. However, that is not a reality because refraining acts are generally not invoked in cases of contingencies but are agreed in advance.”
The rationale behind the scrutiny is that in a recent Authority of Advance Ruling (AAR) decision, a company was asked to pay GST on money collected from employees for canteen services. Therefore, the indirect tax department has extended its logic to say that any payment by an employee to the employer for any purpose must attract GST.
According to GST, any such transactions would continue to attract tax as any payment from an employee to an employer is not exempted.

MS Mani, partner with Deloitte India also stated, “The recent decision by the AAR in Kerala on canteen services has opened up several other issues including notice pay or anything pertaining to the chargeable services provided by employers to employees. An evaluation of specific facts in a given context alone would aid in coming to a conclusion on the taxability and valuation of such transactions as GST is a transaction driven tax.”
“Currently, this is just a tax department’s stand. For mal tax demands would be raised if companies do not follow the cue and after a tax audit is completed,” said one of the persons. Few companies are looking to tax the amount and pay up while others are not making any payment until a formal demand.
And the third way is to collect the notice amount from the employee and putting it in the books stating the inclusion of the 18% GST,” said an official in an IT company.
“Early exit pay is merely an understanding between the employee and his current employer and there is no element of rendering of service. Such logic may not fly a test of technical scrutiny,” said Suresh, partner at Grant Thornton.

In the letters, the indirect tax department advised the companies that such transactions must be covered under GST. “The company provides a service to the employee and the employee is makes a payment for the same. This is a legit transaction and GST must be applied on this,” another person close to the sources stated.