Library / Goods and Services Tax: The Professional's Master Guide

30. Employees, Directors and Group Companies

Transactions with employees, directors and group companies often carry no invoice or price. GST reaches some of them through Schedule I and the valuation rules for related persons.

30.1 Employees: Schedule III and perquisites

Services by an employee to the employer in the course of employment are neither goods nor services (paragraph 1 of Schedule III). Salary therefore carries no GST. Employer and employee are related persons under section 15, and Schedule I paragraph 2 treats supplies between related persons without consideration as supplies. But the proviso to that paragraph says gifts by an employer to an employee up to Rs. 50,000 in value in a financial year are not supplies.

Circular 172/04/2022-GST clarified that perquisites given under the employment contract are not supplies. It also clarified that the proviso to section 17(5)(b), which allows ITC where it is obligatory for an employer to provide goods or services to employees under any law, applies to the whole of clause (b), including food, health services, life and health insurance and travel benefits.

Recoveries from employees

Canteen: where the employer collects the employees' share and passes it to a canteen contractor without any margin, advance rulings have generally held that the employer is not supplying food. Where the employer runs the canteen itself and charges, it is a supply.
Notice pay and bond amounts: Circular 178/10/2022-GST clarified that forfeiture of salary or payment by an employee for leaving before the agreed period or without notice is not consideration for tolerating an act, and is not taxable.

Illustration 161: Diwali gifts and canteen

Mehta Pharma Ltd. gives each of its 400 employees a gift hamper worth Rs. 6,000 at Diwali and a watch worth Rs. 48,000 to 10 senior staff for long service. It has a canteen for 600 workers in its factory as required by the Factories Act, 1948. Canteen contractor bills are Rs. 5,00,000 a month plus 5% GST.

Step 1: Each employee receives gifts within Rs. 50,000 in the year: hamper Rs. 6,000, and for senior staff Rs. 6,000 + Rs. 48,000 = Rs. 54,000.

Step 2: For the 10 senior staff the total exceeds Rs. 50,000, so the gifts become supplies. Tax is payable on the value of the gifts (the full value, not only the excess) at the applicable rate. Credit on the watches is doubtful: section 17(5)(h) blocks goods disposed of by way of gift, and the department does not accept that paying tax on the gift unlocks it.

Step 3: For the 390 other employees, hampers are not supplies. ITC on them is blocked under section 17(5)(h) as gifts.

Step 4: Canteen: provision is obligatory under the Factories Act, so ITC of Rs. 25,000 a month is allowed under the proviso to section 17(5)(b), subject to the employer not recovering a margin. (Restaurant services at 5% carry no ITC in the hands of the canteen contractor, but that does not block the employer.)

Key point

The Rs. 50,000 limit counts all gifts to an employee in the year. Track gifts by employee code.

30.2 Directors

Circular 140/10/2020-GST drew the line. Remuneration to a director that is treated as salary in the books and on which tax is deducted under the salary provisions of the income-tax law is not taxable, because the director is an employee. Other payments to a director, such as sitting fees and commission to independent directors, are consideration for services by the director to the company. These are taxed under reverse charge: the company pays 18%.

Illustration 162: Sitting fees under reverse charge

Nirmal Plastics Ltd. pays its managing director a salary of Rs. 3,00,000 a month and pays three independent directors sitting fees of Rs. 40,000 per meeting for 6 meetings in a year, plus annual commission of Rs. 2,00,000 each.

Step 1: Managing director's salary: Schedule III, no GST.

Step 2: Sitting fees = 3 x 6 x Rs. 40,000 = Rs. 7,20,000; commission = 3 x Rs. 2,00,000 = Rs. 6,00,000. Total = Rs. 13,20,000.

Step 3: Reverse charge at 18% = Rs. 2,37,600 (CGST Rs. 1,18,800 + SGST Rs. 1,18,800), paid in cash and taken as ITC.

30.3 Secondment and cross charge

Judicial view: Secondment of employees

Commissioner of Customs, Central Excise and Service Tax v. Northern Operating Systems (P) Ltd. (Supreme Court, 2022): where an overseas group company seconds its employees to the Indian entity, keeps the right to recall them and remains their legal employer, it supplies manpower service to the Indian entity. The Indian entity was liable to service tax under reverse charge on the reimbursements. Under GST the principle leads to IGST under reverse charge on import of services.

Circular 210/4/2024-GST softened the valuation. Where the Indian recipient is eligible for full ITC, the invoice value of services from a foreign related party is treated as open market value under the second proviso to rule 28(1), and nil where no invoice is issued. Circular 199/11/2023-GST applies the same logic to services by a head office to branches in other States (distinct persons under section 25(4)): with full ITC at the branch, the declared value is accepted and salary cost of head office staff need not be included. From 1 April 2025, common input services from third parties must be distributed through an ISD registration.

30.4 Corporate guarantees

A holding company that gives a guarantee to a bank for its subsidiary's loan supplies a service to the subsidiary even if it charges nothing. Rule 28(2) (from 26 October 2023) values it at 1% of the amount guaranteed per year, or the actual consideration, whichever is higher. Circular 204/16/2023-GST clarified that a director's personal guarantee without consideration is not taxable, because the director's remuneration covers it. Circular 225/19/2024-GST clarified that rule 28(2) applies to guarantees issued or renewed on or after 26 October 2023, on the full amount guaranteed (not the amount disbursed), at 1% a year (proportionately for a shorter period), with tax due when the guarantee is issued and again on each renewal, and that an Indian company guaranteed by a foreign parent pays under reverse charge. A July 2024 amendment made the invoice value acceptable where the recipient is eligible for full ITC. Rule 28(2) does not apply to exports of services.

Illustration 163: Corporate guarantee for a subsidiary

Sharma Holdings Ltd. guarantees a bank loan of Rs. 40 crore taken by its subsidiary Sharma Solar Pvt. Ltd., for one year from 1 November 2025, without charge. Sharma Solar makes both taxable and exempt supplies and is not eligible for full ITC.

Step 1: Value under rule 28(2) = 1% of Rs. 40,00,00,000 = Rs. 40,00,000.

Step 2: GST at 18% = Rs. 7,20,000, payable by Sharma Holdings (IGST if the subsidiary is in another State; otherwise CGST Rs. 3,60,000 + SGST Rs. 3,60,000).

Step 3: If Sharma Solar were eligible for full ITC, an invoice at the value declared (even a nominal one) would be accepted, and the tax would be neutral for the group.

Practice note

Arm's length price under the income-tax law and open market value under GST are separate tests. An upward transfer pricing adjustment needs a supplementary invoice with tax; a downward one needs a credit note. Officers now ask for the transfer pricing report in GST audits.

Chapter summary

• Salary is outside GST; employer gifts up to Rs. 50,000 per employee per year are not supplies; contractual perquisites are not supplies (Circular 172/04/2022).

• Director salary is outside GST; sitting fees and commission are taxable under reverse charge (Circular 140/10/2020).

• Secondment is a supply of manpower (Northern Operating Systems); with full ITC the declared value, even nil, is accepted (Circular 210/4/2024).

• Cross charge to branches: declared value accepted where branch has full ITC (Circular 199/11/2023); ISD compulsory from 1 April 2025.

• Corporate guarantees between related persons: 1% per year or actual consideration, whichever is higher (rule 28(2)).