GST: Reimbursements to private sector employees likely to be taxed

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Reimbursements made to employees of private sector companies are likely to be subjected to GST.

Though the GST Council has not made such an observation, companies and chartered accountants have inferred this on the basis of a ruling in Kerala.

As part of its ongoing exercise of filing returns under the GST, a Kerala-based company flagged the issue of money it was recovering from employees towards canteen services provided by it, before the Authority for Advanced Rulings (AAR).

Part of the Finance Ministry, the legally constituted AAR under the Central GST Act and the State GST Act, is intended to help applicants plan their activities which are liable for payment of GST, well in advance. The broad objectives of the mechanism of advance ruling include providing certainty in tax liability in advance, in relation to an activity proposed to be undertaken by the applicant, reduce litigation and pronounce ruling expeditiously in a transparent manner.

“Recovery of food expenses from the employees for canteen services provided by the company would come under the definition of 'outward supply' as defined in Section 2(83) of the Act, and therefore taxable as a supply of service under GST,” the AAR responded.

Simply put, all reimbursements that private sector companies make to their employees – from medicine bills to telephone bills, health insurance and conveyance bills among others – will be subjected to GST, if the Appellate Authority for Advance Ruling (AAAR) , also set up under the GST Act, upholds the new ruling.

The company appealed saying that it does not make any profit while recovering the cost of the food items from the employees, and only the actual cost of food was being recovered, and it was only facilitating the supply of food which is a statutory requirement under the Factories Act, 1948.

The AAR responded that a notification regarding exemption not withstanding, that pertained to service tax and not GST! The reimbursement amounted to “deferred payment” it said, ruling that it would come under the definition of “outward supply” and is taxable as a supply of service under the GST.

Gurugram-based chartered accountant Sanjaya Kuman Jain suggested that the AAR ruling notwithstanding, the GST Council's would be the final word on this. But if implemented, it could affect the reimbursements, and more importantly the facilities that private sector companies provide their employees, as it would increase the employees' cost to company. He pointed out that some reimbursements, which used to be charged as service tax earlier, were withdrawn.

“Hitherto, it was felt that the expenditure being reimbursed was already taxed. But when the government is trying to increase its revenue, manage its fiscal deficit, it will obviously look to collect whatever tax it can from wherever an opportunity seems to exist. Most companies will find a way to deal with this, though it can no longer be presumed that reimbursements equals tax free money,” explained the tax expert.