Service Tax Implications on Notice Pay

by | Oct 11, 2019

This is to apprise you regarding a recent order passed by the Commissioner (Appeals), Noida on applicability of service tax on notice pay recovery from employees. This has become an industry wide issue and the department in the erstwhile regime, had been demanding service tax on notice pay from several taxpayers.

 

In this case, the department contended that the notice pay recovery is towards ‘toleration of an act’ by the taxpayer and qualifies as a ‘declared service’. Importantly, there was a draft Circular issued by DGCEI under the service tax regime in which it was clarified that ‘notice pay recovery’ will qualify to be a declared service of tolerating an act provided by employer to its employee. Hence, such amount will attract service tax.

 

We represented this case before the Commissioner (Appeals) and contended that ‘notice pay’ is not a consideration for any activity but is compensatory in nature. Further, the same is also part of an employer-employee relationship and thus, fall outside the purview of service tax. Accordingly, no service tax can be levied on such transaction. The Commissioner (Appeals) accepted all the arguments put forth by us and has allowed the appeal.

 

NITYA Comments:

 

The aforesaid ruling is amongst the first ones on the applicability of ‘declared service’ entry on notice pay recovery. This ruling will be equally relevant under GST regime as well which contains similar provisions. Hence, where taxpayers have substantial recoveries toward notice pay, they can opt not to pay GST on notice pay recoveries. For past period, taxpayers can continue to challenge applicability of service tax on this transaction on the above grounds.

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