Is GST applicable in case of an employer-employee relationship?
No. GST is not applicable on salary received from employer. Only a small number of activities are excluded from the scope of GST. And yes, Salary (i.e services by an employee to the employer in the course of or in relation to his employment) is one of them.
Whether GST also covers salary and remuneration to employees within its ambit –
While reading the Act/circulars and the notifications, you may believe that GST also covers salary to employees but a closer look at the topic in hand says otherwise.GST (Goods and Services Tax) is on supply of goods, services or both. Introduced from July 01, 2017, completely changed the tax structure of the Country. A number of queries arose about the applicability and other provisions of GST. The Department (CBEC) went ahead and clarified the issue.
An e-flier was issued by the department on June 14, 2017 which gave clarity on the matter. It briefly mentions the supplies which are not chargeable to GST. For your reference, here is an excerpt of that e-flier –
Schedule III to the CGST Act, 2017 spells out activities which shall be treated as neither supply of goods nor supply of services or outside the scope of GST. This includes:
1. Services by an employee to the employer in the course of or in relation to his employment.
2. Services of funeral, burial, crematorium or mortuary including transportation of the deceased.
3. Sale of land and sale of building where the entire consideration has been received after completion certificate is issued or after its first occupation.
The first point clearly mentions that services by an employee to the employer in the course of or in relation to his employment are not to be considered as supply under GST.
Important points to note –
1. Relationship – There has to be an employer-employee relationship.
2. In the course of employment – Once the employer-employee relation is established, only services provided in the course of the employment are out of the scope of GST and are not considered as supplies. Everything else will come within the scope of GST.
3. Employee to employer – Services have to be provided by the employee on behalf of the employer and not as a principal.
How to determine the nature of the relationship between the employer and the employee –
The tax deducted at source can be helpful in determining the nature of the relationship between the employer and employee. An example of this can be found in the following scenario –
An ex-employee who was earlier just a regular employee of the company and after retirement has been providing consultancy services to the company. Before retiring, an employer-employee relationship existed and the payments were made in the form of salary. TDS here would have been deducted under section 192 of the Income Tax Act. However, on retiring, the employer-employee relationship came to an end. The company needed the experience of the retired employee and thus hired his/her services. This would be in the form of professional services and not in the course of employment. The consideration, here,
would be payable as professional fees. TDS here would be attracted in under section 194J (payment to professionals) and the services will be covered under GST.
The e-flier issued by the department makes it quite clear that services by an employee to the employer in the course of employment is outside the scope of GST. However should the relation between the employer and employee change, then GST may be applicable. This check should be done whenever such a change in the relationship occurs.