GST LLP - Impact of GST on employee benefits in India

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Impact of GST on employee benefits in India

The employee-employer relationship is no longer a sole business of the human resource department. The Impact of GST on employee benefit is significant as the new indirect tax regime which will be applicable from 1st July 2017 is going create changes in some employee advantages. There is a growing sense of positivity on GST as the country is achieving momentum towards its most important tax reform ever since independence. GST is trying to bring a new perception to taxing principles by putting a strong system by eliminating the current tax limitations.

GST on employee benefits is an important topic to discuss and this article will try to elaborate the pros and cons of GST on employee-employer relationship.

Many employers offer various freebies to the employees and such benefits come under income tax under the present indirect tax structure. But, with GST’s launch, employers will tolerate some taxes for giving such benefits and therefore GST impact on employer is a serious issue to discuss. This direct tax will turn into indirect tax and GST will enter the scenario if there is a supply of any free goods and services from employers to employees.

The clause 4(b) of the GST law notes that if goods used for the business purpose are put to any kind of private use, whether or not for a consideration, such usages will result in a supply of services and therefore, it will trigger a GST levy. According to this provision, if employees avail such services and use them for personal benefit, it will generate a GST levy.

Many organizations offer several facilities including subsidized or free food at the workplace, sponsorship of fitness centers, cabs for daily commuting, life or health insurance, etc. to their employees. The employers can avail input tax credit on such facilitates they offer to the employees. But employees cannot avail such input tax credit under the GST regime.
The only ray of hope is that if the government notify such cases of services, the employer can avail input tax credit under similar cases. GST benefits the employer in such scenario only.

Employers offer various gifts to the employee on several occasions and festivals. Schedule 1 of GST law says that it will not treat ‘gifts’ whose values are not more than INR 50,000 in a financial year as the supply of goods and services. Although GST laws have not defined the term ‘gift’ yet.

On the other hand, the amenities which are not part of the CTC will come under GST from 1st July onwards.

Freelancing is one of the most promising industries in India and we have the second largest freelancing sector after the United States of America. This industry is presently catering to more than 15 million people who are working independently in various fields like programming, designing, writing, animation, videography, etc. Like other sectors, GST will also change the freelancing scenario in India.

The freelancers pay both Service Tax and VAT when they offer software services under the present tax structure. It creates a cascading effect as the freelancer employees need to pay the both taxes. As a result, the cost of the software increases. However, GST will decrease the price of the software by solving this cascading effect. In addition to this, freelancers can avail basic exemption up to the total income of INR 20 lakhs under the GST regime.

Freelancers may need to pay 18% service tax which is presently 15% from 1st July. It will increase the indirect taxation and as a result cost of services will be more for the end consumers. They need to register themselves under the states from where they offer services due to the absence of a centralized registration facility under the GST.

The freelancer service providers will suffer heavier legal compliance burden as they have to file a variety of returns every year from different registered locations.

GST on employee benefit is interesting as the new indirect tax structure will give relief to them by reducing their direct taxes. It may also lead the employers to cut many benefits as they will not get input tax credit facility under this new indirect tax regime. Everyone has to accept a GST tax rate where there is a supply of goods and services. The benefits of GST will create controversy and discussion between employer and employee. It will also create a deep impact on the relation between the both parties and this may change the employment scenario of India.