A contractual agreement or appointment letter generally provides that an employee must serve a notice period after giving the notice to resign from the employment. The primary intent of keeping this clause in the agreement is that the employer will have adequate time for making an alternative arrangement for the resigned employee. In many private organizations, employees are legally bound to serve for a specified period which can vary from 15 days to 3 months or sometimes more. The notice period depends on the designation or role of the employee during the termination of the employee contract. If the particular employee fails to serve the notice period, then the security amount collected during appointment or amount which could be part of the salary will be withheld by the organization as ‘Notice Period Pay’. According to the Revenue Department previously service tax and now GST is applicable to the recovery of notice pay. In this article, we will bring clarity on the issue of whether Notice pay recovery is liable to GST or not? What is Notice Pay Recovery? Employees resigning from their job have to serve a notice period as specified in the employment contract. If the employee fails to serve such a notice period, the salary of the unserved notice period is retained by the employer. For example, if the employer had to pay Rs. 20,000 for a month and the unserved notice period is 15 days then the employer will pay only Rs. 10,000 as salary to the employee. Notice pay recovery of Rs. 10,000 can be viewed as income to the employer. The notice pay recovery amount is considered to the employer for tolerating the act of the employee of not serving the notice period, which was the employee’s contractual obligation. This transaction is liable to GST. GST on Employment Services GST applies to 'Supplies' of goods and services. The scope of the term 'supplies' has been defined in Section 7 of the Central Goods and Services Tax Act, 2017 (CGST Act), which includes transactions made for a consideration. In some cases mentioned in Schedule I of the CGST Act, transactions are treated as supplies even if the consideration is absent which includes supplies between related persons when such supplies are made in the course of business. GST applies on the supply of taxable goods and services specified in Schedule II CGST Act, 2017 which mentions explicitly certain activities to be treated as goods and services: Agreeing to provide the service by refraining from an act, To tolerate an act or situation,To do an act is considered as service. Schedule III entry 1 to the CGST Act, 2017 explains that services provided by an employee to the employer during or concerning the individual's employment shall not be regarded as the supply of goods or services. Notice pay recovery is a deduction made from the salary payable to the resigning employee. The Notice pay recovery is not a separate consideration from an independent contract. It should be covered within entry 1 of schedule III. The transactions which are excluded from the levy of tax between employee and employer are: Supply of services by an employee to the employer during the course of employment.Gifts are given by the employer to the employee not exceeding the amount of Rs 50,000 in a Year. GST on Notice Pay Recovery The question of service tax on Notice pay recovery started after the introduction of the negative list on service tax in the year 2012. The definition of service under section 65(B) of the Finance Act, 1994 became wider, covering almost everything. The Revenue department promoted the service tax demands across the country, stating that the employer has tolerated the act of quitting from the service within a short time. This type of toleration results in the rendition of service. For this purpose, the revenue department relies on the entry made under section 66E(e) of the Finance Act,1994, in the definition of “declared service”.These demands have been discussed before the appellate tribunals on various grounds. The employee decided to resign by paying an amount equivalent to a month of salary in place of notice, acts following the employment contract. Hence no question of any forbearance or tolerance will arise from the side of the employer. Further, according to the agreement, the resignation by the employee is not subject to any acceptance or approval and the employee is free to tender his resignation and make payment of notice period salary to leave. Hence, there is no role of the employer in the employee's resignation. It must be noted here, that there is no consideration within the meaning of Sec.2(31)(b) of the CGST Act, 2017 flowing from an act of forbearance. There is no breach of contract here as no question of any consideration for forbearance would arise in case of breach of contract. Recent Decisions under Service Tax Recently two decisions are delivered deciding service tax is not liable on Notice pay recovery. The decisions are: Case: GE T&D India Ltd v. D.C.C.E, Chennai 2020 (1) TMI 1096-Madras High Court The Honorable Madras High Court, in this case, held that the employer cannot be said to have rendered any service per se much less a taxable service. The Court also said that the employer merely facilitated the exit of the employee by imposing a cost on him for the sudden exit. The definition in Section 66E of the Finance Act does not apply in this scenario as the employer has not tolerated any act of the employee but has permitted the sudden exit while being compensated by the employee. Case: HCL Learning Systems Vs CCE, Noida 2019 (12) TMI 558-CESTAT Allahabad In this case, it was held that notice pay recovery is out of the salary already paid. It is to be noted here that salary is not covered under the provisions of service tax. Impact of the Above Decisions on GST on Notice Pay Recovery A similar entry in Section 66E(e) of the Finance Act, is also there in Entry No. 5(e) Schedule II of the GST law under the definition of ‘supply’ given under section 7 of the CGST Act, 2017 as amended. Hence, the rationale of the above decisions applies under GST too. Therefore it can be said that GST is not liable on Notice pay recovery. Wrapping Up An individual taxpayer can rely on these decisions and also be assured that there is no supply of any service to the employees in case of notice pay recoveries. Representations are to be made from the industrial associations to seek clarity from the government on the subject of notice pay recovery as it is pervasive to recover amounts in service industries. The employees can expect some relief from paying GST relying on the above decisions. There is no GST liability on the notice pay recovery even after the amendment in the definition of supply. The Revenue department needs to clarify the position of law to avoid litigation on this point. For any help in relation to GST services, you can contact Enterslice and take the help of our advisory services. Read, Also: Simplified and New GST Returns from April 2020 .