The amount recovered on resignation, penalty for breach of contract condition falling under clause (e) of section 66E of the Finance Act 1994 makes the company liable for service tax. The company may ask for the Service Tax amount on the bond value or treat it as inclusive of service tax.
The link to view clause (e) of Section 66E: [Declare Services in Service Tax Law](http://www.taxindiaupdates.in/declare-services-in-service-tax-law).
One more thing, apart from the Service Tax Law, is that one High Court has given a judgment that binding an employee under a bond is unconstitutional and invalid. So, any employee who faces this situation may file a writ.
From India, Bangalore
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3The link to view clause (e) of Section 66E: [Declare Services in Service Tax Law](http://www.taxindiaupdates.in/declare-services-in-service-tax-law).
One more thing, apart from the Service Tax Law, is that one High Court has given a judgment that binding an employee under a bond is unconstitutional and invalid. So, any employee who faces this situation may file a writ.
From India, Bangalore
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Dear Friends,
As per amendments in Service Tax rules from time to time, now the service Tax is applicable on all the services except the services mentioned under Negative List of services provided. Hence the notice pay may get covered under Service TAx Rules as Companies collect money from the resigning employees for tolerating early termination from the employment, without serving notice period and such receipts could be liable to service tax in the hands of company, at the limb – …………..to tolerate an act or a situation and service tax could be demanded.
Please go through the following.
Services in course of employment
Under the negative list based taxation, all the services covered under the definition of service wef July 2012 shall be taxable, except the services listed in Negative list or services exempted vide mega exemption notification.
As per Section 65B (44), definition of service reads as under:
“Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include;
…………………………..
a provision of service by an employee to the employer in the course of or in relation to his employment;
In other words, the service provided by employee to employer in course of employment is excluded from service tax levy.
Service tax implication on short notice recovery
Now it is clear that, there is no exclusion or exemption to the services provided by employer to employee. The same is also not covered in the exclusion limb of the service definition either and covers declared services in the definition of service, and declared services, as per section 66E (e) sets out as under:
‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’
Companies collect money from the resigning employees for tolerating early termination from the employment, without serving notice period and such receipts could be liable to service tax in the hands of company, at the limb – …………..to tolerate an act or a situation and service tax could be demanded.
At same time, it should not be lost sight that under negative list based taxation, the Service tax levy is an activity tax. Service tax is leviable on service being ‘any activity’ for a consideration. Though the company is receiving a consideration, there is no activity done by company to the employee in exchange for consideration of notice period recovery. A view is possible that the fundamental premise of ‘activity for a consideration’ itself is not satisfied, in which case the Service tax levy may not be applicable.
Even though it is not liable, as of date there is no clarification/circular clarifying non applicability of service tax on notice period recovery, erring on caution the service tax could be decided to be paid by the company as under.
Whether service tax can be collected from the employee?
As per Section 68(1), service tax is payable by the provider of taxable services, except in some specified instances where the service receiver is liable. As service tax is destination based levy the service tax could also be collected from the service receiver and paid to Government by the service provider. This view was also held in All India Federation of Tax Practitioners & others v/s Union of India (2007 (7) S.T.R. 625 (S.C.))
An employer, who is recovering amount towards short notice, could collect and pay the service tax at 12.36% from the employee. As a tax planning, company could insert a clause in the employment agreement, stating that service tax payable extra by employee as applicable. If company does not collect service tax extra.
If company does not collect extra service tax, then it shall bear the service tax out of pocket by calculating the service tax on inclusive basis as per Sec 67(2) of the Act.
An illustration is provided below for the benefit of readers for clear understanding of the concept.
Illustration:
Mr. Vijay, a professional software programmer, employed in M/s ABC Software Pvt Ltd having an experience of 2 years, drawing a salary Rs.75,000 p.m. and wish to leave the company as he has got some better opportunity elsewhere. So he decides to leave M/s ABC and as per the terms of employment he shall serve notice period for a period of 3 months. Compute the amount of service tax payable by the company.
Solution:
In the given case assuming that Mr. Vijay has served only one month of notice period and did not serve other two months and agreed to pay off his short notice.
Situation 1:
No separate clause in the employment agreement, with respect to service tax and the company did not collect service tax from Mr. Vijay.
Amount received as short notice recovery for 2 months Rs.1,50,000 (Rs.75,000 * 2 months)
Service tax included in Rs.1,50,000 Rs.16,501 (Rs. 150,000*12.36/112.36)
Therefore in the current situation M/s ABC shall pay a service tax of Rs.16,501 from this receipt.
Situation 2:
A separate clause in the employment agreement is inserted saying ‘that the amount recovered would be in addition to the applicable service tax’
Amount received as short notice recovery for 2 months Rs.1,50,000 (Rs.75,000 * 2 months)
Service tax on in Rs.1,50,000 Rs.18,540 (Rs. 150,000 * 12.36%)
Therefore in the current situation M/s ABC shall pay a service tax of Rs.18,540 from this receipt, which shall be collected from the Employee.
Conclusion
Though there is no activity of service, there is a flow of consideration from employee to employer and also at present there is no clarity in the law. Since, service tax law is new and developing with grey areas, erring on caution the recovery towards short notice could be levied to service tax and it is advisable to remit service tax by the employer either by collecting it from the employee or shall be paid by employer by calculating service tax on inclusive basis as illustrated above.
So conclusion
From India, Aurangabad
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As per amendments in Service Tax rules from time to time, now the service Tax is applicable on all the services except the services mentioned under Negative List of services provided. Hence the notice pay may get covered under Service TAx Rules as Companies collect money from the resigning employees for tolerating early termination from the employment, without serving notice period and such receipts could be liable to service tax in the hands of company, at the limb – …………..to tolerate an act or a situation and service tax could be demanded.
Please go through the following.
Services in course of employment
Under the negative list based taxation, all the services covered under the definition of service wef July 2012 shall be taxable, except the services listed in Negative list or services exempted vide mega exemption notification.
As per Section 65B (44), definition of service reads as under:
“Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include;
…………………………..
a provision of service by an employee to the employer in the course of or in relation to his employment;
In other words, the service provided by employee to employer in course of employment is excluded from service tax levy.
Service tax implication on short notice recovery
Now it is clear that, there is no exclusion or exemption to the services provided by employer to employee. The same is also not covered in the exclusion limb of the service definition either and covers declared services in the definition of service, and declared services, as per section 66E (e) sets out as under:
‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’
Companies collect money from the resigning employees for tolerating early termination from the employment, without serving notice period and such receipts could be liable to service tax in the hands of company, at the limb – …………..to tolerate an act or a situation and service tax could be demanded.
At same time, it should not be lost sight that under negative list based taxation, the Service tax levy is an activity tax. Service tax is leviable on service being ‘any activity’ for a consideration. Though the company is receiving a consideration, there is no activity done by company to the employee in exchange for consideration of notice period recovery. A view is possible that the fundamental premise of ‘activity for a consideration’ itself is not satisfied, in which case the Service tax levy may not be applicable.
Even though it is not liable, as of date there is no clarification/circular clarifying non applicability of service tax on notice period recovery, erring on caution the service tax could be decided to be paid by the company as under.
Whether service tax can be collected from the employee?
As per Section 68(1), service tax is payable by the provider of taxable services, except in some specified instances where the service receiver is liable. As service tax is destination based levy the service tax could also be collected from the service receiver and paid to Government by the service provider. This view was also held in All India Federation of Tax Practitioners & others v/s Union of India (2007 (7) S.T.R. 625 (S.C.))
An employer, who is recovering amount towards short notice, could collect and pay the service tax at 12.36% from the employee. As a tax planning, company could insert a clause in the employment agreement, stating that service tax payable extra by employee as applicable. If company does not collect service tax extra.
If company does not collect extra service tax, then it shall bear the service tax out of pocket by calculating the service tax on inclusive basis as per Sec 67(2) of the Act.
An illustration is provided below for the benefit of readers for clear understanding of the concept.
Illustration:
Mr. Vijay, a professional software programmer, employed in M/s ABC Software Pvt Ltd having an experience of 2 years, drawing a salary Rs.75,000 p.m. and wish to leave the company as he has got some better opportunity elsewhere. So he decides to leave M/s ABC and as per the terms of employment he shall serve notice period for a period of 3 months. Compute the amount of service tax payable by the company.
Solution:
In the given case assuming that Mr. Vijay has served only one month of notice period and did not serve other two months and agreed to pay off his short notice.
Situation 1:
No separate clause in the employment agreement, with respect to service tax and the company did not collect service tax from Mr. Vijay.
Amount received as short notice recovery for 2 months Rs.1,50,000 (Rs.75,000 * 2 months)
Service tax included in Rs.1,50,000 Rs.16,501 (Rs. 150,000*12.36/112.36)
Therefore in the current situation M/s ABC shall pay a service tax of Rs.16,501 from this receipt.
Situation 2:
A separate clause in the employment agreement is inserted saying ‘that the amount recovered would be in addition to the applicable service tax’
Amount received as short notice recovery for 2 months Rs.1,50,000 (Rs.75,000 * 2 months)
Service tax on in Rs.1,50,000 Rs.18,540 (Rs. 150,000 * 12.36%)
Therefore in the current situation M/s ABC shall pay a service tax of Rs.18,540 from this receipt, which shall be collected from the Employee.
Conclusion
Though there is no activity of service, there is a flow of consideration from employee to employer and also at present there is no clarity in the law. Since, service tax law is new and developing with grey areas, erring on caution the recovery towards short notice could be levied to service tax and it is advisable to remit service tax by the employer either by collecting it from the employee or shall be paid by employer by calculating service tax on inclusive basis as illustrated above.
So conclusion
From India, Aurangabad
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The interpretation of certain clauses which have no direct links to the "Employment" environment cannot be justified. If argued that there is no exclusion, there is also no inclusion. If this argument of section 66E (e) "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" can be extended, there are innumerable instances to levy such ST on fines, etc. For example, a fine levied on riding a two-wheeler without a helmet, without a DL, not appearing in court, not wearing a uniform in schools and colleges, late coming to the office, and so on. Could someone say ST can be levied on 'refraining from an act?' Where is the end? If there are any settled cases available, we may have some clue on the subject to determine what is right.
From India, Bangalore
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From India, Bangalore
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In general parlance, "service" means employment. However, this is different from a service that is rendered by a service provider. Thus, there is a distinction. If a working maid works in a household, that means she is employed there. Is there any provision for recovery of service tax from a household maid?
From India, Delhi
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From India, Delhi
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In my opinion, Company recovering Service Tax should be registered under the Service Tax Rules so that charged Service tax could be deposited with the Govt. It could not be understood how the notice period recovery is a service on which Service Tax is chargeable. Is there a limit on the value of services above which service tax is applicable? Payment of salary/wages or deductions therefrom (short notice period recovery can be termed as deductions) cannot be termed as a service liable to service tax. I understand that companies do not issue bills/invoices/notices while charging service tax to their resigning employees for recovering the short notice period.
From India, Panipat
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From India, Panipat
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Agree with the above.
It seems charging service tax from employees is another instance of such small unscrupulous companies that indulge in activities such as bifurcating minimum wages to save on PF, denying maternity leave to female employees, terminating services when an employee gives notice, having unilateral notice periods, etc. They are the ones who evade taxes, and when it comes to troubling departing employees, they devise illegal means to harass them further. The best way to deal with them is to file criminal cases for cheating. Without a clear order or notification from the government, how can they levy anything from employees on behalf of the government? Deduction from some payout is something, and recovery is an entirely different thing.
From India, Delhi
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It seems charging service tax from employees is another instance of such small unscrupulous companies that indulge in activities such as bifurcating minimum wages to save on PF, denying maternity leave to female employees, terminating services when an employee gives notice, having unilateral notice periods, etc. They are the ones who evade taxes, and when it comes to troubling departing employees, they devise illegal means to harass them further. The best way to deal with them is to file criminal cases for cheating. Without a clear order or notification from the government, how can they levy anything from employees on behalf of the government? Deduction from some payout is something, and recovery is an entirely different thing.
From India, Delhi
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As everybody would agree, the basic ingredients for a service tax levy are absent in the matter of recovery of notice pay. These include: i) rendering service, service provider, and receiver; ii) consideration; iii) determination of invoice value and date; iv) classification; v) employees not being subjected to the levy of service tax.
From India, Bangalore
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From India, Bangalore
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Notice pay recovery certificate.doc
Service Tax on Immovable Property.pdf