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2020 ] TAXABILITY OF NOTICE PAY AS CONSIDERATION — AN ANALYSIS J127
to act. Agreeing to an obligation to refrain from an act or to tolerance an act or a
situation has been specifically listed as a declared service under Section 66E(e) of
Finance Act, 1994. The relevant portion of the declared services is reproduced as
under :
“(e) agreeing to the obligation to refrain from an act, or to tolerate an act or
a situation , or to do an act;”
The issue was clarified in Taxation of Services an Education Guide at Sl. No. 2.9.3
as under :-
“2.9.3 Would amounts received by an employee from the employer on
premature termination of contract of employment be chargeable to service
tax?
No. Such amounts paid by the employer to the employee for premature ter-
mination of a contract of employment are treatable as amounts paid in rela-
tion to services provided by the employee to the employer in the course of
employment. Hence, amounts so paid would not be chargeable to service tax.
However any amount paid for not joining a competing business would be li-
able to be taxed being paid for providing the service of forbearance to act.”
In light of the cited provisions, that any amount or consideration paid by either of
the employer or employee for notice period consideration was not chargeable to
Service Tax.
Tax treatment of notice pay in the GST regime
The taxable event in GST law is “supply of goods or services or both”.
Section 7 of the CGST Act, 2017 defines the expression “supply” to include -
(a) all forms of supply of goods or services or both such as sale, transfer,
barter, exchange, licence, rental, lease or disposal made or agreed to
be made for a consideration by a person in the course or furtherance
of business;
(b) import of services for a consideration whether or not in the course or
furtherance of business; and
(c) the activities specified in Schedule I, made or agreed to be made
without a consideration;
[(1A) where certain activities or transactions, constitute a supply in accord-
ance with the provisions of sub-section (1), they shall be treated either as
supply of goods or supply of services as referred to in Schedule II.]
(2) Notwithstanding anything contained in sub-section (1), -
(a) activities or transactions specified in Schedule III; or
(b) such activities or transactions undertaken by the Central Gov-
ernment, a State Government or any local authority in which
they are engaged as public authorities, as may be notified by
the Government on the recommendations of the Council,
shall be treated neither as a supply of goods nor a supply of
services.
(3) …………….
Further, Schedule III of Section 7 of the CGST Act, 2017 prescribes “activities or
transactions which shall be treated as neither supply of goods nor supply of ser-
vices.

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