The Hon'ble Authority for Advance Ruling in Karnataka in Advance Ruling No. KAR ADRG 31/2024 Dated: 02.07.2024 held that GST is not applicable on the recovery of joining bonus, retention bonus, work from home allowance, and expenses under Tuition Assistance Program (TAP) when employees exit before serving pre-agreed periods.
Facts of the Case:
M/s. Fidelity Information Services India Private Limited (hereinafter referred to as "the Applicant"), having GSTIN 29AAGCS0395D1ZA, filed an application for Advance Ruling under Section 97 of CGST Act, 2017 read with Rule 104 of CGST Rules, 2017 and Section 97 of KGST Act, 2017 read with Rule 104 of KGST Rules, 2017, in FORM GST ARA-01 discharging the fee of Rs.5,000/- each under the CGST Act and the KGST Act.
The Applicant is a Private Limited Company registered under the provisions of Central Goods and Services Tax Act, 2017 as well as Karnataka Goods and Services Tax Act, 2017. They are engaged in the business of software development and maintenance services and Information technology enabled services (ITES) including but not limited to back-office operations, call center services, and business support services to both domestic and overseas customers.
The Applicant provided details on several types of bonuses and allowances they offer to employees:
1. Retention Bonus:
The Applicant offers a retention bonus to incentivize employees and retain them for a longer duration. This bonus is in addition to the existing annual total consideration. The disbursement of the retention bonus is associated with a condition that requires the employee to serve a pre-defined period in the organization. If an employee voluntarily exits the organization within the stipulated time period from the payout date, the retention bonus is recovered from the employee. The same recovery applies if an employee voluntarily moves to a different role through an Internal Job Posting (IJP) within the stipulated period from the payout date.
2. Joining Bonus:
Similar to the retention bonus, the Applicant offers a one-time joining bonus to incentivize an employee to join the organization. This bonus is payable with the first salary of the employee. The disbursement of the joining bonus is subject to a condition that requires the employee to serve a pre-defined period in the organization. If an employee wishes to voluntarily exit the organization within the stipulated time from the date of joining (DOJ), the joining bonus is recovered from the employee.
3. Work from Home (WFH) Allowance:
Due to the outbreak of the COVID-19 pandemic, the Applicant's employees were instructed to work from home in line with various government guidelines. To enable employees to work effectively and efficiently from home, the Applicant provided a one-time work from home set-up allowance amounting to INR 22,000/- to employees. This amount is given as a one-time allowance, payable only once during the entire tenure of the employee in the Company. The allowance is disbursed subject to a condition that requires the employee to serve a pre-defined period from the date of payout in the organization. If an employee wishes to exit before serving the stipulated period, the amount paid as a one-time setup allowance is recovered by the Applicant.
4. Tuition Assistance Program (TAP):
The Applicant provides financial assistance to employees who wish to pursue job-related professional development initiatives through the Tuition Assistance Program (TAP). Eligible employees are allowed to pursue further education in the form of graduate/post-graduate degrees/diplomas or specific certificate courses. The Applicant reimburses INR 50,000/- in a year (except in case of certain employees who would be eligible to claim INR 50,000/- in a period of 3 years) either in full or in part, and the employee can opt for one or more courses/certifications/trainings. The course selected by the employee should be relevant to the employee's existing job role or towards approved company assignments that they may be required to undertake in the future. The amount is expensed on the employee to make them technically proficient and upgrade their skills so that they may contribute more towards the growth of the organization. The amount under TAP is paid with a pre-agreed condition that if the employee wishes to exit the organization, the Company has the right to recover all such payments made to the employee in the preceding 12 months from the date of certification.
The Applicant sought clarity on the applicability of GST on the recovery of these bonuses and allowances in cases where employees exit before serving the pre-agreed periods. Specifically, the Applicant raised the following questions:
1. Whether GST would be applicable on the recovery of joining bonus and retention bonus on account of an employee's inability to serve the organization (or a particular department, in case of retention bonus) for a pre-agreed period?
2. Whether GST would be applicable on the recovery of work from home one-time setup allowance paid to employees in cases where the employees exit before serving the pre-defined period from the payout date?
3. Whether GST would be applicable on the recovery of amounts paid as financial assistance to employees under the Tuition Assistance Program (TAP) policy in cases where the employee exits before serving the pre-agreed period in the organization?
The Applicant provided their interpretation of the law, citing various legal provisions, circulars, and judicial precedents to support their view that GST should not be applicable on these recoveries.
Issue:
Whether GST is applicable on the recovery of joining bonus, retention bonus, work from home allowance, and expenses under Tuition Assistance Program (TAP) when employees exit before serving pre-agreed periods?
Held by the Court:
The Hon'ble Authority for Advance Ruling in Karnataka in Advance Ruling No. KAR ADRG 31/2024 Dated: 02.07.2024 held that:
1. The Authority first clarified that the provisions of CGST Act, 2017 and the KGST Act, 2017 are in pari-materia and have the same provisions in like matter, differing only on a few specific provisions. Therefore, unless a mention is particularly made to such dissimilar provisions, a reference to the CGST Act would also mean reference to the corresponding similar provisions in the KGST Act.
2. The Authority considered the submissions made by the Applicant in their application for advance ruling, the issues involved, the relevant facts, and the arguments made by their authorized representative during the personal hearing held on 13.07.2023.
3. The Authority examined each type of bonus/allowance provided by the Applicant:
a) Retention bonus: The Authority noted that this bonus is offered in addition to the existing annual total consideration to incentivize employees and retain them for a longer duration. The disbursement is associated with a condition demanding a pre-defined service period by the employee in the organization. If an employee voluntarily exits the organization or moves to a different role through an Internal Job Posting (IJP) within the stipulated period from the payout date, the retention bonus is recovered.
b) Joining bonus: Similar to the retention bonus, this one-time bonus is offered to incentivize an employee to join the organization and is payable with the first salary. It is subject to a condition requiring a pre-defined service period. If an employee voluntarily exits within the stipulated time from the date of joining, the joining bonus is recovered.
c) Work from home (WFH) allowance: This one-time allowance of INR 22,000/- was provided to enable employees to work effectively and efficiently from home. It is disbursed subject to a condition requiring a pre-defined service period from the payout date. If an employee exits before serving the stipulated period, the allowance is recovered.
d) Tuition Assistance Program (TAP): This program allows eligible employees to pursue further education relevant to their job role or approved company assignments. The Applicant reimburses up to INR 50,000/- per year, subject to a pre-agreed condition that if the employee exits the organization, the Company has the right to recover all payments made in the preceding 12 months from the date of certification.
4. The Authority relied on Circular No. 178/10/2022-GST dated 03rd August 2022, which clarifies the scope of entry 5(e) of Schedule II of CGST Act 2017, i.e., agreeing to the obligation to refrain from an act or to tolerate an act or situation, or to do an act. Specifically, the Authority focused on Para 7.5 of this circular, which deals with the forfeiture of salary or payment of bond amount when an employee leaves employment before the minimum agreed period.
5. The Authority observed that the Applicant is recovering retention bonus, joining bonus, work from home allowance, and expenses under TAP only when the employee voluntarily exits the organization within the stipulated time period as mentioned in the terms and conditions laid out for each bonus/allowance. The intention behind such bonus/allowance is to incentivize and motivate the employee to remain in the organization.
6. The Authority concluded that the recovery of bonus/allowance by the Applicant is in line with the forfeiture of salary or recovery of bond amount in the event of an employee leaving employment before the minimum agreed period, which is not taxable under GST as per para 7.5 of Circular No. 178/10/2022-GST dated 03.08.2022.
7. The Authority also referred to Circular No. 172/04/2022-GST dated 06.07.2022, which discusses the taxability of perquisites provided by an employer to employees as per contractual agreements. The circular states that perquisites provided by the employer to the employee in terms of contractual agreements entered into between the employer and employee will not be subjected to GST when provided in terms of the contract between the employer and employee.
8. The Authority determined that retention bonus, joining bonus, work from home allowance, and expenses under TAP are in the nature of perquisites provided by the employer to its employees in terms of contractual agreements entered into between the employer and employee, and hence not taxable under GST as per the circular mentioned.
Based on these considerations, the Authority ruled as follows:
i. GST is not applicable on recovery of joining bonus and retention bonus on account of an employee's inability to serve the organization (or a particular department, in case of retention bonus) for a pre-agreed period.
ii. GST is not applicable on recovery of work from home one-time setup allowance paid to employees in cases where the employees exit before serving the pre-defined period from the payout date.
iii. GST is not applicable on recovery of amounts paid as financial assistance to employees under the Tuition Assistance Program (TAP) policy in cases where the employee exits before serving the pre-agreed period in the organization.
Relevant Sections:
1. Section 97 of CGST Act, 2017
2. Rule 104 of CGST Rules, 2017
3. Section 97 of KGST Act, 2017
4. Rule 104 of KGST Rules, 2017
5. Entry 5(e) of Schedule II of CGST Act, 2017
6. Schedule III to the CGST Act
_________________________________________________________
DISCLAIMER: The views expressed are strictly of the author and NLF Tax and Legal Advisory. The contents of this article are solely for informational purposes and for the reader’s personal non-commercial use. It does not constitute professional advice or a recommendation of the firm. Neither the author nor the firm and its affiliates accept any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon. Further, no portion of our article or newsletter should be used for any purpose(s) unless authorized in writing, and we reserve the legal right for any infringement on usage of our article or newsletter without prior permission
Comments