Notice pay recovery: Then and under the GST regime

Stipulation of the notice period in an employment contract is common these days, particularly where attrition levels are relatively high. Specific clauses inserted in the agreement provide that in lieu of serving the notice period, an amount equivalent to the salary for a certain number of months will be recoverable by the employer from the employee.

In the erstwhile service tax regime, employers received notices demanding payment of service tax on the amount received as notice pay from employees. The tax department’s view in such cases was that employers have tolerated a breach of contract by the employee, which amounts to a declared service as per provisions of the Finance Act. On the other hand, assessees contended that tolerating the act of the employee did not amount to performing an activity for consideration and thus should not be liable to service tax.

The Central Board of Excise and Customs’ Education Guide provides that: “The concept ‘activity for a consideration’ involves an element of contractual relationship wherein the person doing an activity does so at the desire of the person for whom the activity is done in exchange for a consideration.” It also provides that imposition of a fine or penalty for violation of a provision of law does not amount to consideration for the activity of breaking the law and accordingly does not attract levy of service tax.

L Badri Narayanan is a partner and Disha Jain is a principal associate at Lakshmikumaran & Sridharan.