Model GST Law on Reimbursement of Expenses
The Financial Express
Executive Director, Tax & Regulatory Services, EY India
There is a growing sense of optimism on GST as India is swiftly gaining momentum towards implementation of its most significant tax triggered business reform post-independence—a game changer which will become reality in 2017 for certain. Apart from various benefits accruing, GST is attempting to bring in altogether a new perception to taxing principles, by putting in place a robust system eliminating most of the limitations that the current tax regime lives with.
A close look at Model GST Law (MGL) suggest that law makers have addressed several issues under existing laws with respect to which ambiguity prevailed, resulting in litigation requiring judiciary to intervene.
One such provision which has been penned differently in MGL deals with services by employee to the employer. It will be quite interesting to analyse the same in the light of existing provisions to understand some of the major changes that it envisages to bring in, going forward.
In terms of provisions of section 65B(44) of the Finance Act, the term service shall not include a provision of service by an employee to the employer in the course of or in relation to his employment. Thus, service in the course of employment, provided by an employee, is an activity which is not a taxable service and, hence, not liable to tax.
While there had been no dispute on taxability of services provided by employee, ambiguity prevailed with reference to taxability of various recoveries made by employer from employee which emanated from employment contract. Diverse views still prevail and the matter is litigated before appellate forums.
Yet another issue which is highly debatable, relates to the secondment of employees by an entity to its group entity. Depending on the arrangement between entities, there are contrary views prevailing as to whether said arrangement creates employer-employee relationship between company and seconded employees. Accordingly if such relationship is created, recoveries in respect of seconded employees stand excluded from the scope of service. There are several rulings dealing with this issue, yet same has not attained finality.
If one looks at the taxability of employee service under GST, a notable change in provisions of MGL is visible, and perhaps, addresses both the aforesaid issues. It is worthwhile to see how it is different from current provisions.
Under Chapter 3 of MGL, which deals with levy of GST, a new term, “Taxable person” has been defined in Section 9, to mean a person who carries on any business at any place in India and who is registered or required to be registered. As per section 9(3)(a), any person who provides services as an employee to his employer in the course of or in relation to his employment, or by any other legal ties creating the relationship of employer and employee as regards working conditions, remunerations and employer’s liability, shall not be considered as a taxable person.
The first and foremost aspect, unlike in current scenario where provision of service by employee is excluded from definition of service, under the MGL, employee service has not been excluded from the ambit of supply of service, instead, the person providing such service, i.e., the employee will not be treated as taxable person and, hence, not liable to GST. This clearly suggests that while the activity by an employee would be treated as supply of service, there will be no GST basis exclusion of employee from the purview of taxable person.
Whether this change would impact taxability of recoveries made by employer from the employee under GST would be an interesting interpretation issue. Whether one may be able to resort to employment contract to contend non-taxability as done under current provisions would also be subject to scrutiny on first principal basis. Employer would be a taxable person and if recoveries made by employer are construed to be supply of services to employee, then there is an exposure to tax under GST.
One likely change that could potentially emerge from the second limb of section 9(3)(a), which covers service of an employee through any other legal ties creating the relationship of employer-employee as regards working conditions, remuneration and employer’s liability. Such employee would also not be treated as a taxable person. Whether one can infer that such cases would also cover ‘secondment’ cases need to be examined separately. If this be the case, salary cost reimbursed for such employee will not be liable to GST. The key issue here would be to understand whether secondment is about one entity providing services to others—in which case supply of service would be from one taxable person to another, exposing the transaction to levy of GST.
Another aspect that would be interesting is whether service by retainers through retainership or contract arrangement should be construed as service rendered by non-taxable person, if such arrangement creates the relationship of employer-employee as regards working conditions, remuneration and employer’s liability. If this be the intent, such retainers might go outside the ambit of taxability. This seems to be creating a fiction of deeming a person on contract to be like an employee, notwithstanding the treatment of such person for the purpose of taxability under the income-tax law.
The MGL is still in draft stage and shall be finalised soon. It would be a welcome move if intent of the government—whether to tax or not such transactions—is brought out with utmost clarity, thus leaving no room for interpretation.