On 1 July, India ushered in the biggest post-independence tax reform with euphoria coupled with anxiety.
It remains to be seen what impact the Goods and Services Tax (GST) will have on the Indian economy in the long run.
While much has been said and written about its impact on corporate entities, it would be interesting to look at key areas for consideration during the course of business under an employer-employee scenario.
GST is levied as a tax on supply of goods or services. Thus, the question arises whether GST can be levied on the provision of services by an employee to the employer. The GST law provides a specific exclusion of services rendered by an employee to an employer in the course of or in relation to his employment.
Interestingly, supply of goods or services, or both, by a related party without consideration and made only in the course or furtherance of business is subjected to GST and an employee is deemed to be a related party of the employer.
As a consequence, an issue has arisen as to whether gifts and perquisites provided free of charge by an employer to an employee can be subjected to GST.
The ministry of finance, in a statement dated 10 July, clarified that gifts of value exceeding Rs50,000 made without consideration is subject to GST when made in the course or furtherance of business.
‘Gift’ has been defined as one made without consideration, voluntary in nature, and made occasionally.
Further, it cannot be demanded as a matter of right by the employee and a court of law cannot be approached for obtaining a gift. Additionally, the statement clarified that no GST would be levied in case perquisites are provided free of charge to all employees, subject to the condition that the employer eventually pays appropriate GST.
The principle would remain in case of free housing provided to employees as part of an employment contract and forms part of cost-to-company (CTC).
In view of the clarification, the possible view is that the perquisites forming part of an employment contract are likely to remain outside the purview of GST.
However, the inclusion of perquisites as a part of an employee’s contract is likely to have income-tax implications to be borne by the employee.
The government’s effort to quickly address the issue emanating from the implementation of GST is laudable. However, the rationale of levying GST on gifts of more than Rs50,000 to employees is still questionable as any transaction between employer and employee should be considered as in the course of or in relation to his employment.
This is further exemplified by the fact that such a gift is taxed in the hands of the employee as a perquisite. Thus, while GST is one of India’s boldest tax reforms, one hopes that a hurried implementation does not curtail its potential to provide larger benefits to society.
How will GST impact non-resident Indians (NRIs) or expatriates?
With the implementation of GST impacting positively on sectors such as logistics, warehousing, automobiles, film production, DTH (direct-to-home TV), multiplexes, etc., it will make India an attractive destination for investment into these sectors by NRIs.
NRIs can avoid multiple taxations amounting to indirect taxes from both state and central systems. NRIs involved in export businesses have an advantage in that, GST is not applicable to goods and services exported from India. A big incentive to the NRI community is bringing the myriad tax departments under one umbrella, thereby improving compliance and simplifying an NRI’s investment process.
Will NRIs or expatriates need to obtain registration under GST?
Yes, NRIs/expatriates undertaking occasional business transactions in India, without having a fixed place of business, would require to obtain registration as a non-resident taxable person or casual taxable and comply with the provisions of the Goods and Services Tax Act.
What will get costlier in the GST regime?
With GST in place the following will get costlier:
a. Accommodation in hotels would attract 28% GST where the room tariff is more than Rs7,500 per unit per day
b. Air-conditioned restaurants serving/not serving liquor would attract GST at the rate of 18%
c. Renting of a motor car would attract GST at the rate of 18%
d. Under-construction immovable property being flats, commercial buildings, etc., would attract GST at the rate of 18% after allowing deduction of land value to the extent of one-third of the total amount of immovable property
e. Commercial renting of immovable property would attract GST at the rate of 18%
As compared to the erstwhile Service tax regime, where the rate of tax was 15%, GST on commission or fees paid to facilitating agents or banks would now be taxed at 18%.
CA Sudeep Das contributed to this article.
Vikas Vasal is national leader, tax, Grant Thornton India LLP. You can send in your queries to firstname.lastname@example.org