Introduction

1. The issue of taxability of employee reimbursements and applicability of reverse charge mechanism on the same is a hot topic after the implementation of GST. This article talks about different aspects of reimbursements made to employees by a company and analyses different scenarios and depicts various views on the relevant provisions of the GST Acts.

2. Key scenarios discussed in this article

(i)		Reimbursement of expenses for supplies received by employees from registered dealers
(ii)		Reimbursement of expenses for supplies received by employees from unregistered dealers
(iii)		Expenses for which employer is not under any obligation to reimburse

3. Analysis

3.1 Reimbursement of expenses for supplies received by employees from registered dealers:

Expenses of personal nature:

3.1.1 In this case supplies are received and enjoyed by the employees such as reimbursement of conveyance, lunch or dinner expenses in his personal capacity. Even if such expenses are not directly linked to the official duties of the employee, employer may reimburse these expenses according to the terms of their employment or HR policy of the employer (reimbursements can be fixed like Travel allowance/Dearness Allowance or may be based on actuals as well). Further, the provider of such services shall issue a tax invoice and charge applicable GST on such services.

In the books of account the employer would account for these expenses as salaries or employment cost.

Expenses related to the business of employer:

3.1.2 Under such scenario, expenses are essentially incurred for the employer’s business and the payment made by the employee is on behalf of the Employer like expenses of repair of office furniture paid by the employee and thereafter reimbursed by the employer. Further, provider of such services shall issue a tax invoice and charge applicable GST on such services.

For accounting purposes, the employer shall record these expenses as ‘other business costs’ in the books of account.

Position under GST:

3.1.3 In terms of Schedule III, read with Section 7 of the CGST Act, the following activities or transactions are neither treated as a supply of goods nor supply of services:

“Services by an employee to the employer in the course of or in relation to his employment”

Since these expenses are made in the course of or in relation to the employment, these shall not be treated as supplies under GST and, thus, reimbursements made to the employees shall not be liable to GST.

Further, as the expenditure is in the nature of business cost incurred for the furtherance of business, employer shall be eligible to avail of the Input Tax Credit (ITC) of the GST paid by employee, at the time of receipt of such supplies, subject to the condition that the tax invoice should contain the name and GSTIN of the employer as the recipient.

Reimbursement of expenses for supplies received by employees from unregistered dealers:

3.2 As per the discussions in point above, it can be concluded that reimbursements to the employees shall not be leviable to GST, irrespective of the fact that the expenses are personal in nature or related to the employer’s business as both are made in the course of employment.

Applicability of Reverse Charge Mechanism:

3.2.1 Section 9(4) of the CGST Act provides for the taxability of certain transactions under Reverse Charge Mechanism (RCM). The relevant excerpts from the Act are as below:

“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.”

In terms of above stated provision, where the supply has been made by unregistered dealer to the registered dealer, the onus of discharging the tax liability under RCM shall be on registered recipient.

Therefore, in order to confirm the liability under RCM, it is pertinent to determine the recipient of goods/services as well as his registration status under GST regime, i.e., whether registered or unregistered.

To determine the actual recipient of the supply, reference can be made to the definition of “recipient” as given under Section 2(93) of the CGST Act, which is reproduced as below:

“(93) “recipient” of supply of goods or services or both, means—

(a)		where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;
(b)		where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and
(c)		where no consideration is payable for the supply of a service, the person to whom the service is rendered,

and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied;”

In the light of highlighted portion above, it can be construed that agent always receives the services on behalf of the principal who is the actual recipient of the supplies made.

Since employee can always be said to be an ‘agent’ of his employer, the aforesaid section illuminates that principal/employer shall be considered as the ‘recipient’.

Further, to support the aforementioned view, arguments can be taken that the employer, being an artificial juridical person, can only operate through its employees. As a result, the employer cannot stay in a hotel room or cannot travel in a rented car, etc., but all these things are done by the employer through its employees. Accordingly, in such cases the recipient of such services is the employer for the reasons that such services are effectively consumed in the business carried on by the employer. In addition to the above, it can also be said that in the absence of his official work/duty the employee would have not taken such supplies.

Therefore, even if the privity of contract of supply of goods/services may be between the employee and the supplier, the employer shall be considered as the ‘recipient’.

After defining the recipient, one has to further determine the registration status of the employer, i.e., registered or unregistered, for confirming the liability to discharge tax under Section 9(4). For determining the status of employer, relevance can be place on Section 25 of the CGST Act which is as below:

“(1) Every person who is liable to be registered under section 22 or section 24 shall apply for registration in every such State or Union territory in which he is so liablewithin thirty days from the date on which he becomes liable for registration, in such manner and subject to such conditions as may be prescribed”

In terms of portion highlighted above, it can be inferred that person registered in one State may not be registered in another State. For that reason, registration status will have to be checked State-wise.

Expenses for which employer is not under any obligation to reimburse:

4. In such scenario employer may, on special occasions/circumstances, reimburse the personal expenses of the employee even if the employer is not obligated to do so under the employment contract. For example, on New Year employer may reimburse the tour expenses of the employees.

In terms 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”

However, the term “gift” has not been defined in the GST Acts. Whereas Section 122 of the Transfer of Property Act, 1882 (TOPA) defines the term “gift” as follows:

“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.”

From the above definition and understanding from the general parlance, it can be construed that anything given voluntarily without any consideration (not on routine basis) can be considered as a gift. Therefore, reimbursement of personal expenses of employee made on special circumstances will be considered as gift which should not be subject to GST if value is less than fifty thousand rupees (per employee) in a financial year.

Conclusion:

5. Taking into account the above discussions, it can be stipulated that if the employer is registered in the same State where Place of Supply (POS) of services/goods falls then the employer shall be charged with GST liability under RCM in conformity with the provisions of Section 9(4). In case employer is registered in one State and situs of POS falls in another State, RCM provisions will not get attracted.

Further, as discussed above, ITC shall be available to employer subject to the condition that Tax invoice contains the name and GSTIN of the employer as the recipient (this is important because of matching concept introduced in GST laws).

In addition to the above, auditor of employer can also raise the questions/queries while booking the expenses of the invoices which are in the name of employees. Therefore, every employer should ask their employees to receive invoices with the name and GSTIN of the employer as recipient for expenses incurred on behalf of the employer.