Demystifying Employee Gifts under GST

The rollout of Goods and Service is being dubbed to be the mother of all indirect tax reforms in the country but in reality, it is a business process reform. It changes the way we do business in India after the rollout of GST. There is no room for the words purchase or sale of goods in the GST Laws, it replaces these words with Supply. The word supply includes all activities which are undertaken for consideration or in lieu of consideration i.e barter. This nails down all the disputes which are there in the current taxation.

Similar to this we also have another concept called the taxation of employee benefits, though employee benefits are taxed under the current taxation under Income Tax Act 1961, it is being proposed to tax the same under Goods and Service Tax also in India. The taxation of employee benefits has been taken from Malaysia, where GST is implemented from 1st of April 2015.

To understand the tax implication of employee benefits let’s see the definition of Supply and Related Parties.

Supply is defined clearly in section 3 and Schedule I &  II states what activities are to be treated as supply as per the Central Goods and Service Tax Bill introduced in the Parliament

Section – 3

  1. all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
  2. import of services for a consideration whether or not in the course or furtherance of business;
  3. the activities specified in Schedule I, made or agreed to be made without a consideration; and
  4. the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

Schedule I

  1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
  2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:

Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.

  1. Supply of goods—
    1. by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
    2. by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.
  2. Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business.

In paragraph 2 we find the wordings “Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as the supply of goods or services or both”.

The basis of the above, here we do not have any consideration received but still, GST has to be paid.

Gifts are not normally given to employees for their exceptional performance or during the festivals and these are not part of the offer letter or the appointment letter. Now under GST, ll such gifts either in kind or in cash or in form of services provided by the company will be taxed and it means that the company has to pay GST on such transactions.  When gifts are issued there is no consideration received from the employee, as discussed it is token of appreciation or for their loyalty.

Now companies or establishments have to pay GST similar to the reimbursement costs collected from the employees like issue of duplicate ID card etc.,

Though the schedule talks about the threshold limit of Rs 50,000 one thing which is not clear is “is GST applicable one the gifts from the one rupee or only on the amount which crosses Rs 50,000. As of now, the law is not clear on this point, we need to wait for the final rules and law.

Another question is how to pay the GST, does the company has to issue a tax invoice? If yes will the buyer and seller will be the same? Under which section of the GSTR – 1 return this tax invoice has to be shown? Clarity is also required in this context also.

Value of gifts issues in a financial year means total values of gifts issued during the financial year from time to time, this means that there should be a provision in the accounting or any other software the taxpayer is using to keep track of the same in the system by employee and that should be able to generate a tax invoice once it crosses Rs 50,000 for an employee.

The next question, can the registered taxable person claim input tax on the gifts procured to be distributed to the employees?  Input tax credit is eligible only if used for the furtherance of business or used for the outward supply of goods or services, this is clear from the section 16 and 17 of the CGST Act.  Say for example A Ltd wants to give  Diwali gift to all its employees Halidram sweet boxes costing Rs 3000 each. A Ltd incurs Rs 1,75,000 for bringing the sweet boxes to it is office as transportation costs, is GST paid on the inward transport cost is eligible to be taken as input tax credit?

Section 16 as input tax credit is eligible only if it used for the furtherance of business but in the case of gifts, it will directly impact the furtherance of business. Say if A Ltd does not give Diwali gifts to its employees their morale will come down and resulting in it lower performance and thereby impacting the furtherance of business. The basis of this logic can A Ltd take input tax credit on GST paid on the transportation charges?

Clarity is required in this context also else it can lead to disputes between the trade and industry.

It is normal practice to provide tea or coffee or any other beverage to the employees, though it is not part of the appointment or offer letter, does the cost of coffee or tea cost should be included gifts value? This is not recommended by the government so technically it has to treated as a gift if we go by the clause A of subsection 5 of Section 17 of the CGST Act.

  • the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or

Or we have to wait for the list to be notified by the government, if yes then it should spell out that providing of coffee or tea is not to be treated as gift.

In the meantime, the companies have to relook their practice of giving gifts to employees and also have proper systems in place to pay taxes if any such a need arises. For this, the systems being implemented in place should track the gifts by the employee. The offer letter/appointment letters issued should be revisited and if required the clauses need to be modified in line with the GST requirements. The early they do this activity the better for the organizations.

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the author may or may not be associated with in professional or personal capacity unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

These examples are based on the information available in the public domain and authors interpretation of the law and may change based on the actual law passed.

Demystifying Supply under the Model GST Law

Currently, taxes are levied on manufacturing or removal of goods in case of central excise and on sales in case of value added tax. In the Model GST law sale or manufacturing or removal of goods is being replaced with the word “supply”. The word supply is expanding the scope for levy of tax as well as reducing the scope of interpretation. Though the word supply is a broader word compared to sales, the definition for the supply of goods and services is given very clearly under the Model Law. Since supply is being used in place of supply, taxes will be applicable on some of the transactions like branch transfers and supply of material for job work is outside the scope of supply.

In the current tax regulations in India, we have multiple taxes like Central Excise, Value Added Tax, Central Sales Tax and local levies like Octroi in few cities. There is no proper definition for sale under any of the above laws, this gives a wider scope for interpretation and raises disputes between the industry and tax regulators. If have a close look at the Central Excise Act, as per Section

2, sub-section (h) it is, “sale” and “purchase”, with their grammatical variations and cognate expressions, mean any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration;

As per Gujarat Value Added Tax 2005, Section 23 ,

“sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration and includes,-

(a) transfer, otherwise than in pursuance of a contract, of property in goods for cash, deferred payment or other valuable consideration,

(b) transfer of property in goods (whether as goods or in some other form) involved in execution of a works contract,

(c) delivery of goods on hire purchase or any system of payment by installments,.

(d) transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration,

(e) supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration,

(f) supply of goods by a society or club or an association to its members on payment of a price or of fees or subscription or any consideration,

(g) supply of goods by way of or as part of any service or in any other manner whatsoever, of

(h) supply of goods being food or any other article for human consumption or any drink (whether or not intoxicating) where such supply or service is for cash, deferred payment or other valuable consideration,

(i) supply by way of barter of goods,

(j) disposal of goods by a person in the manner prescribed in

Explanation (iii) to clause 10 but does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase” with all their grammatical variations and cognate expressions shall be construed accordingly.

Explanation.- (i) – For the purposes of this clause, “sale within the State” includes a sale determined to be inside the State in accordance with the principles formulated in sub-section (2) of section 4 of the Central Act;

(ii) for the purpose of sub-clause (b) of the expression “works contract” means a contract for execution of works and includes such works contract as the State Government may, by notification in the Official Gazette, specify;

(iii) every transfer of property in goods by the Central Government, any State Government, a statutory body or a local authority for cash, deferred payment or other valuable consideration, whether or not in the course of business, shall be deemed to be a sale for the purposes of this Act;

As per Central Sales Tax Act 1956 sale is defined as per section 2, sub-section (g ) as

“sale”, with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration, and includes,–

  • a transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;
  • a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
  • a delivery of goods on hire-purchase or any system of payment by installments;
  • a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
  • a supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;
  • a supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, but does not include a mortgage or hypothecation of or a charge or pledge on goods;

We have seen three different acts, and the meaning of sale is different, this leads to confusion on levy of taxes, say for example in the case of the lease transaction, is VAT applicable or service tax is applicable or both? It is left for the judiciary to decide the applicability and levy of tax. By going through the definitions of the lease, sales, service tax, etc. it is clear that for a lease there is a transfer of ownership, that means sales tax is leviable under Article 366(29A)(c) of Constitution and states can levy a tax on lease transactions under Entry 54 of List II.  Going forward under GST as there is only one tax for goods and services, this confusion does not arise and moreover, in the definition of supply, it is clearly mentioned supply includes Lease as per section 3 of the Model GST Act.

(1) Supply includes

(a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,

(b) importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, and

(c) a supply specified in Schedule I, made or agreed to be made without a consideration.

Illustrations

Let’s try to understand the meaning and scope of supply with few examples

Illustration for transfer

A Ltd has a manufacturing unit in State X and sales depots in states Y & Z. A Ltd transfers it’s finished goods from factory to depots. When goods are transferred from Factory to depot GST is applicable or not?

As per the definition of Supply under Section 3, supply includes transfers, so GST is applicable on transfers also. Under the current laws only excise duty is applicable on transfers but going forward under GST even VAT, i.e., SGST is also applicable along with CGST and in the case of inter-state transfers IGST will be applicable.

Illustration for Exchange

A walk in customers enters into an Electronics Shop and wishes to buy a new laptop by exchanging his old laptop. The price of the new laptop is Rs 46,000 and under the exchange, he pays on Rs 34,000. Under GST tax payable on which amount? Rs 46,000 or Rs 34,000.

GST is payable on Rs 46,000 as the definition of the supply includes exchange, under GST on the exchange also GST is to be levied, and this is a change in the business process which retailers have to adopt it, and consumers must also accept the fact that tax has to be paid on exchanged products.

Illustration for Importation of Service

C Ltd hires services of a service engineer for one of its machinery imported for annual maintenance. Is GST applicable on this transaction?

Yes, GST is applicable on this transaction as subsection 2 of section 3 of the model GST Act clearly states that GST is applicable in the case of importation of services also.

Illustration for transfer of assets

XYZ Ltd is an IT company and uses desktops and laptops. As policy change, XYZ decides to upgrade all the desktops to laptops and decides to donate the desktops to a government school so that students there can gain computer literacy. Is GST applicable on this transaction as consideration is not being received as it is a charity?

Yes GST is applicable on this transaction as there is a transfer of business assets from XYZ’s name to the school. GST has to be levied based on the transaction price.

 Illustration for disposal of business assets

PQR Ltd wants to enhance its manufacturing capacity to retain more market share. It decides to sell the existing machinery. If GST applicable on sale of machinery?

Yes, GST is applicable on sale of old machinery as it is business asset

Illustration for temporary application of business assets for private use

B runs earth moving equipment hiring business and rents out JCB’s, procaliner, etc. on rental basis. B acquires a residential plot for construction of his house; he puts to uses one JCB at the plot to make it for leveling for the ground, is GST applicable on this transaction.

Yes, GST is applicable as the business asset is put to use for personal use, B Ltd has to pay GST on this as business and individual are different entities.

 

Schedule II of the Model GST Act explains clearly to distinguish the what is a supply of goods and what is a supply of services.

  1. Transfer

(1) Any transfer of the title in goods is a supply of goods.

(2) Any transfer of goods or of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services.

(3) Any transfer of title in goods under an agreement which stipulates that property in goods will pass at a future date upon payment of full consideration as agreed, is a supply of goods.

  1. Land and Building

(1) Any lease, tenancy, easement, licence to occupy land is a supply of services.

(2) Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

  1. Treatment or process

Any treatment or process which is being applied to another person’s goods is a supply of services.

  1. Transfer of business assets

(1) Where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person.

(2) Where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services.

(3) Where any goods, forming part of the business assets of a taxable person, are sold by any other person who has the power to do so to recover any debt owed by the taxable person, the goods shall be deemed to be supplied by the taxable person in the course or furtherance of his business.

(4) Where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—

(a) the business is transferred as a going concern to another person; or

(b) the business is carried on by a personal representative who is deemed to be a taxable person.

  1. The following shall be treated as “supply of service”

(a) renting of immovable property;

(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or before its first occupation, whichever is earlier.

Explanation.- For the purposes of this clause-

(1) the expression “competent authority” means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:–

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodeling of any existing civil structure;

(c) temporary transfer or permitting the use or enjoyment of any intellectual property

right;

(d)development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software;

(e)agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

(f) works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(g) transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; and

(h) supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than

alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.

  1. The following shall be treated as supply of goods

(a) supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.

In the Model GST Law tries to address lot of ambiguity we have today in the definition of what is supply of goods and services. Guidelines have been laid clearly for identifying what is supply of goods and what is supply of services and as it is a single law it also avoids the confusion of levy of taxes easily unlike the current regulations.

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

These examples are based on the model law and may change based on the actual law passed.