Page 30 - GSTL_26th March 2020_Vol 34_Part 4

J126 GST LAW TIMES [ Vol. 34

TAXABILITY OF NOTICE PAY AS CONSIDERATION — AN ANALYSIS
TAXABILITY OF NOTICE PAY AS
CONSIDERATION — AN ANALYSIS
TAXABILITY OF NOTICE PAY AS CONSIDERATION — AN ANALYSIS
By
Ramesh Chandra Jena, B.A. (Hons.), M.A. (Eco.),
D.M.M., LL.B.
MANAGING PARTNER, TAXPAYERS ADVISORY SOLUTIONS

An industrial establishment or factory before giv-
ing employment to an employee is required to issue an
appointment letter which incorporates all terms and con-
ditions of employment. Serving an advance notice of leaving of the Organization
by employee or a notice of removing an employee from the service of the com-
pany are conditions set forth in the appointment letter and the notice period may
be vary from one month to three months.
Notice period provides adequate time to management to look for re-
placement of the outgoing employee. In case an employee resigns but does not
want to serve the notice period as per his employment agreement, the employee
can serve a short notice and pay the employer for the amount of salary for the
notice period not worked. Similarly, the employer sometimes terminates the em-
ployee without serving advance notice in which case the employee can demand
the salary for the notice period from the employer. Notice pay consideration is
the amount of salary is required to be paid by employee or employer due to
shortfall of mutually agreed notice period as per appointment letter.
The article studies the issue of “the taxability of notice pay considera-
tion” paid by employee or employer for the compliance of employment agree-
ment.
Tax treatment of notice pay in the post GST regime
The taxable event was “Service” in the post-GST regime. ‘Service was de-
fined in clause (44) of Section 65B of Finance Act, 1994 and means any activity
carried out by a person for another for consideration, and includes a declared
service, but does not include -
(a) any activity constitute merely …………….
(b) a provision of service by an employee to the employer in the course
of or in relation to his employment;
(c) fees taken in any Court…………………
From the cited provision it is crystal clear that service provided by the employer to
employee in the course of employment does not qualify as service and was not
liable for Service Tax during the relevant period.
Further, the term “activity” was not defined in the Act. In terms of the
common understanding of the word activity would include an act done, a work
done, a deed done, an operation carried out, execution of an act, provision of a
facility etc. It is a term with very wide connotation.
Activity could be active or passive and would also include forbearance

GST LAW TIMES  26th March 2020  126