Employee Reimbursement under GST

With implementation of GST, lot of confusion has prevailed regarding taxability of transactions between employee and employer and applicability of reverse charge mechanism on such transactions. In this article, we look at the applicability of GST on employee reimbursements in detail.

GST Act & Law

Before we analyse the applicability of GST on employee reimbursements, lets look at some related rules:

As per clause 1 of schedule III, read with section 7 of the CGST Act, 2017, services provided by the employee to the employer in the course of or in relation to his employment shall neither be treated as supply of goods nor supply of service.
As per section 15 of the CGST Act, 2017, employer and employee are related persons.

Employee Reimbursement - Purchase from Registered Dealer

A registered dealer is a supplier having GST registration. When expenses are incurred by an employee on behalf of the employer in terms of purchases from a registered dealer, GST would not be applicable on the money reimbursed by employer to employee. For GST not to be applicable, the transaction must have the following characteristics:

The expenses incurred is for the furtherance of the business of the employer.
Expenses are incurred by the employee in the course of or in relation to employment, and such expenses are reimbursed by the employer.
The supplier has issued a tax invoice and has charged GST on such services. The tax invoice contains the name and GSTIN of the employer as recipient.

If all of the above conditions are satisfied, the employer will be eligible to avail of the Input Tax Credit (ITC) of the GST paid by employee.

Employee Reimbursement - Purchase from Unregistered Dealer

An unregistered dealer is a supplier not having GST registration. In such cases, the supplier would not have charged GST on the supply of goods or services as well. As provided above, even for purchase from unregistered dealers, the expenses incurred by the employee in the course of or in relation to employment and reimbursement of such expense by the employer will not attract GST. However, when services are provided by unregistered dealer to the employee (who is merely receiving the service on behalf of the employer) than in such case provisions of reverse charge mechanism would apply. Note: GST reverse charge mechanism is suspended temporarily.

Reverse Charge on Employee Reimbursement

As per relevant provisions of section 9 (4) of the CGST Act, 2017 : “The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.” Plain reading of above provisions clarifies that when there is supply from unregistered dealer to a registered dealer, it is the liability of registered dealer to pay GST under reverse charge mechanism. Hence, when an employee incurs expenses on behalf of the employer than the employee is simply acting as an agent of the employer and hence on the basis of section 2(93) of the CGST Act, 2017 the employer i.e. the principal would be considered as the ‘recipient’. Thus when employee has incurred any expense on behalf of the employer, the recipient of the service would be the employer. Further, if such services are received from any unregistered dealer, the employer would be liable to pay GST under reverse charge mechanism on such transaction.

Gift to Employee under GST

As per provisions of Schedule II, read with Section 7 of the CGST Act, “gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both”. The definition of gift has not been provided in the GST Acts hence we have to consider the definition as provided under other Acts. As per section 122 of the Transfer of Property Act, 1882 the definition of gift is as under: “Gift is the transfer of certain existing movable or immovable property made voluntarily and without consideration, by one person, called the donor, to another, called the done, and accepted by or on behalf of the donee.” Hence it can be concluded that anything given voluntarily without any consideration can be considered as a gift. Therefore, reimbursement of personal expenses of employee can on special circumstances be considered as gift and should not be subject to GST if value is less than INR 50,000 in any financial year. Know more about Gifts under Income Tax Act.

GST Registration

GST LUT Form