Introduction:
Services provided by employee to employer in the course of or in relation to his employment are excluded from the definition of ‘Service’ as given under Section 65B(44) of Finance Act, 1994. Hence no service tax is applicable on activities performed by employees to employers in course of employment. However the current article highlights the issues involved regarding applicability of service tax on any services extended by employer to employee in the course of or in relation to such employment. In corporate sector especially in IT Industry, it is the usual practice for the employer to extend a variety of services to employees. The following are widely provided such services.
- Canteen facility: This service includes supply of food at the work place for a concessional rate to employee.
- Access to sports/ gymnasium/cultural facilities: Many a times these services are provided at work place by employers without charging any amounts from employees as part of staff welfare. In such cases, no service is involved as there is no consideration. Sometimes these services are provided by charging nominal amounts from employee to recoup the maintenance costs of these facilities.
- Free transport facility: This service includes to and fro transportation of employees between work place and home.
- Concessional Loan/Finance Facilities: This service includes extending loans/finance at a concessional rate of interest.
- Notice Period Pay: Sometimes, employees are obligated to give prior notice say two months in advance for leaving the employment. In case the employee violates this condition, employer recovers/forfeits two months’ salary and allows him to leave the employment. This is a kind of passive act involving employer agreeing to tolerate an act (breach of prior notice) for consideration (two months’ salary).
With these insights on nature of services generally extended by employer to employee, let us proceed to examine the service tax implications on the said transactions.
Whether Employer Services to Employee Covered Under Section 65B(44):
The definition of ‘Service’ as provided under section 65B (44) is reproduced as under;
"service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include‑
- a provision of service by an employee to the employer in the course of or in relation to his employment;
(c) ---------------------------------------------------------------------------------
Upon plain reading of clause (b), by adopting literal interpretation, it appears that ‘Service’definition excludes only a provision of service by an employee to the employer in the course of or in relation to his employment but not vice versa. This would mean that if any employer provides any services to employee for consideration, then the same constitutes service and is not excluded.
Draft Circular of CBEC Propagating the Above Interpretation:
The above stated interpretation is unofficially mooted by Revenue at the time of introduction of Negative list based taxation through a draft circular F.No. 354/127/2012-TRU dated July 27, 2012, which states that, activities carried out by employers to employees for consideration are taxable, unless specified in the Negative List or otherwise exempted. The taxability has been clarified by para 9 and para 10 which is reproduced as follows;
“9. One of the ingredients for the taxation is that such activity should be provided for consideration. Where the employees pays for such services or where the amount is deducted from the salary, there does not seem to be any doubt. However, in certain situations,_______ such services may be provided against a portion of the salary foregone by the employee. Such activities will also be considered as having been made for a consideration and thus liable to tax…………………………………………………………………..
- However, any activity available to all the employees free of charge without any reduction from the emoluments shall not be considered as an activity for consideration and will thus remain outside the purview of the service tax liability (facilities like crèche, gymnasium or a health club which all employees may use without any charge or reduction from the salary will be outside the tax net).”
In view of the above clarification, it is very clear that the Revenue target is to tax any non-cash benefits/services extended by employer to employee factored as part of employee CTC (cost to company) at the time of appointing an employee. This would mean that even for extending a benefit/service, if no separate charge is made but the same is factored as part of CTC, then the same is said to have been provided for consideration (i.e. employee service) and the same is liable to service tax.
For example, benefits like free holiday travel facility, car for personal use, rent free accommodation are factored in CTC but no costs are recovered from employees. These facilities even if provided without any charges from employees, the same would be considered as provided for consideration (i.e. employment) and would be subject to service tax.
However any activity which is not part of non-cash benefits/services considered for CTC provided free of cost without charging anything from employee then the same will not be a service on the reason that there is no consideration involved. For example, employer allowing unrestricted access to gym facility at work place for all employees which is not even factored for the purpose of CTC. In such cases, it is treated as activity undertaken without consideration and the same shall not be liable to service tax.
The above draft circular was released at the time of introduction of Negative list based taxation in the year 2012 for public comments; but for reasons unknown the same is not yet released officially. Despite this, there is no bar for Revenue authorities to resort to such interpretation.
Recently, the DGCEI in its MO Circular has dealt with the issue regarding leviability of service tax on forfeiture of security deposits by employees. The recovery of an amount, in terms of forfeiture of security deposit or other payments, from employee for leaving the organization without giving stipulated notice or completing the bond period is a common phenomenon in business organizations. The DGCEI opined that the activity of forfeiture of a security deposit for short notice given by the employee is a taxable service as per the provisions of Section 66E (e) of the Finance Act, 1994, covered under the declared services of, "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to doan act". Thus, services by employer to employee like Notice period pay are chargeable to service tax from the standpoint of DGCEI.
Recent Contrary view of Advance Ruling Authority (AAR):
On the other contrary, the AAR in a recent case of JP Morgan Services India Private Limited, 2015-TIOL-12-ARA-ST has considered the applicability of service tax on employer services. In the said case, the applicant has given an option to employees to hire cars for their personal and official use. For this requirement, the applicant has taken vehicles on hire from a leasing company. The applicant has recovered from the employees the lease charges that are paid to leasing company. The applicability of service tax on the lease charges paid by employee to employer has been examined.
The AAR has interpreted the definition of ‘Service’ under Section 65B(44) to mean that provision of service of by an employee to an employer in the course of or in relation to his employment cannot be considered as service as the same is excluded from the definition of ‘Service’. Once the activity of employment services to employer is excluded from ‘Service’ definition, the said definition cannot be applied for any non-monetary benefit extended by employer to employee in reciprocation to employee services.
In order to add strength to this interpretation, one can put forward the argument that an activity excluded from ‘Service’ definition is different from a service covered under Negative list or mega exemption notification and is outside the ambit of service tax in entirety i.e. even any activity undertaken in reciprocation to the said excluded employment service is also out of the ambit of service tax levy. However, in the humble opinion of the paper writers, the said judgment is not in detail to address the issue holistically from all possible corners.
Conclusion:
Going by plain language of ‘Service’ definition under Section 65B (44) and drawing support from draft circular, employer services to employee could be considered as liable to service tax. The contrary interpretation adopted by AAR created doubts over the service tax applicability thus making the issue further gloomier.
This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
