Amid a talent war among companies, the issue of high attrition rate has taken centre stage in the corporate world. However, another crucial point of debate among tax officials and companies is the tax treatment on salaries of employees serving the customary notice period.

A recent ruling in the case of Bharat Oman Refineries, which is a subsidiary of state-owned Bharat Petroleum, by the Central Board of Indirect Taxes and Customs' Authority of Advance Ruling (AAR) said the GST will be applicable on different employees' recoveries.

These include telephone bills paid by companies, group insurance of the company employees, and payment of salaries on serving the notice period, The Economic Times reported. As per the definition of GST, the government charges a specific tax on any activity viewed as "supply of service". These services can either be direct or indirect.

The ruling said if an employee is resigning from a company, and he or she serves the notice period, it's the company that is providing services to the employee.  

In a similar order passed by the Gujarat Authority of Advanced Ruling in July 2020, the GST authority had ruled that the applicant is "liable to pay GST on recovery of notice pay" from the employees leaving the company without completing the notice period as specified in the appointment letter issued as per the contract entered between the employer and the employee.

The order was passed on an application by Amneal Pharmaceuticals Pvt Ltd, Ahmedabad. The Authority had said the applicant is liable to pay GST at 18 per cent under the entry of “services not elsewhere classified, on recovery of notice pay from the employees who are leaving the company without completing the notice period".

The authority reached the conclusion after going carefully through the case-law of Gujarat State Fertilizers & Chemical Ltd (2016), wherein it was held that the cessation of employment should also be treated as employment service not liable for service tax. It also perused the decision of Allahabad CESTAT in the case of HCL Learning Systems Vs CCE, Noida, wherein it has been held (November 2019) that when amounts are recovered out of salary already paid, such amounts would not be subject to service tax as salaries are not subject to tax.