Service tax on notice pay
Nookala Subrahmanyam
(Querist) 18 June 2015
This query is : Resolved
Central Excise Audit Party has raise the issue to pay service tax on notice pay amount collected from the employees, who left the organization without notice period.
As per the terms and conditions specified in the appointment order, there is a condition to give notice for three months before leaving/resigning the job. But in a special situation the employee is decided to leave the organization without giving the notice period.
Company will collect the salary for three months as a notice pay. in view of the department is nothing but a tolerance of act hence it attracts the service tax. under section 66E(e). Is it required to pay.
Kumar Doab
(Expert) 19 June 2015
This tax is being charged.
Seek opinion from CA, I.Tax lawyer of your company.
Anirudh
(Expert) 19 June 2015
In the 'negative list' scenario, where every service, unless exempted from tax, is liable to service tax, unless you show that your activity is either in the negative list or specifically exempted, you have no other go than to pay the service tax.
Guest
(Expert) 20 June 2015
Mr. Nookala,
You may please read the provisions of the relative section with specific reference to Rule 3 (Point of Taxation Rules, 2011) for the purpose of clarity.
This point has also to be kept in view, who pays whom in lieu of his services or no service.
In this case the service provider (employee) is not being paid anything by the employer for not providing his service, or agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. Rather the service provider is compensating the employer, as a matter of penalty, for not fulfilling the service conditions.
So, in my view the amount of compensation to the employer, not being salary payable to the employee for his services, should not attract any service tax.
However, in my view, if the employee is paid for not providing his service, or agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, e.g., salary of three months on his spot termination in liew of notice period by the employer, only that could have attracted the service tax.
IN OTHER WORDS, AS PER MY OPINION, NOTICE PAY, IF PAID BY THE EMPLOYER TO THE EMPLOYEE ONLY SHOULD ATTRACT THE SERVICE TAX, NOT THE NOTICE PAY PAID BY THE EMPLOYEE TO HIS EMPLOYER.
Anirudh
(Expert) 20 June 2015
Dear Mr. Dhingra,
The claim by the Revenue is that the employer (not employee as assumed by you) is providing the service to the employee by tolerating the non-availability of notice period service of the employee.
Guest
(Expert) 20 June 2015
Dear Anirudh,
The audit party's decision is quite arbitrary. Service provider is the employee, not the employer, who pays him for service. In no way an employer can be termed as a service provider. The audit party need to review their decision with particular reference to classification of taxable service according to the terms of the sub-clauses (105) of section 65 as well as the definiion of actionable claim, under the provisions of Section 65(B).
Notice period (time content) cannot be treated as a service by the employer.
Any payment by a service provider (employee) as a penalty for non-service or defective service to his employer cannot be assumed to fall within the purview of service tax. Had that been true, why every compensation paid by service providers for deficiency in service to the claimants, as awarded by the Consumer forums are not being taxed?
Anirudh
(Expert) 20 June 2015
Dear Mr. Dhingra,
I am afraid you have got things mixed up.
Please note the services rendered by employee to his employer and the salary earned by him is not under the purview of the service tax.
The employer can insist that the employee should serve the notice period. In lieu thereof, if the employer agrees to relieve the employee by taking from the employee the amount in lieu of notice period, the employer is definitely rendering a service to the employee. After the advent of the 'negative list', the classification of service has lost its relevance.
Now coming to the point of service tax not being levied on the amount of compensation being paid by service providers in the case of deficiency of service. Please note, the service provider in this case is made to pay the compensation - he is not the recipient of the compensation. Therefore the same cannot be taxed to service tax in the hands of the service provider. The next question would arise whether it is being taxed to service tax in the hands of the recipient. Surely it will be, provided the threshold limit for levy of service tax gets triggered in the hands of the recipient of the compensation. Other wise not.
Guest
(Expert) 20 June 2015
Dear Anirudh,
Probably, we are bothering our head by hitting in the dark without knowing what service the company provides for which that has been registered with the service tax authorities. That point can be clarified only by the querist, who is the Manager (Excise) in the company.
Let Mr. Nookala first clarify this point.
Guest
(Expert) 20 June 2015
Mr. Nookala,
What product or service your company is selling?
Nookala Subrahmanyam
(Querist) 03 October 2015
Sir,
I would like to bring to your kind notice that the agreement or the appointment order is clear with condition. if the employee has quit the job without three months notice, the employee has to pay the Three months salary employer. If Employer has terminated the employee then he the employer will pay three months salary. no one is violating the agreement. then there is no question of tolerance of act. Please comment exports can we stand on this issue.
Nookala Subrahmanyam
(Querist) 03 October 2015
sir,
Mr. PS Dhingra,
we are manufacturing paper and paper board under chapter heading No. 48
we are availing the input service towards payment of our final product duty. we are not providing any out put service
Nookala Subrahmanyam
(Querist) 27 November 2015
Mr. PS Dhingra I am working as a Sr. Manager (Excise) in this company M/s International Paper IPAPPM Limited. My simple argument is whatever conditions mentioned in the appointment order regarding termination * employer will pay three months salary to employee. **If employee is leaving without any notice he has to pay three months salary to employer. there is no tolerance of act or agreement. Further the relation is established basing on salary and employment. Once the remuneration is spelt as salary it would not cover under the service tax net. Please comment.
Guest
(Expert) 27 November 2015
Mr. Nookla,
Your perception is quite correct. Salary element, whether paid by employer to the employee or the employee compensates his employer for leaving service without serving for the notice period does not fall within the purview of service tax. The audit is merely splitting the hair. Service by the employee to his employer or any return service by the employer to his employees have not been included in the ambit of service tax. You may ask the auditor to quote specific provisions of law, where such services have been included in the service tax law.
