Employee Reimbursement under GST

GST Act & Law

The applicability of GST on employee reimbursements, and some related rules:

  • According to section 7 clause 1 of schedule III, of the CGST Act, 2017, services provided by the employee to the employer in the course of or in relation to his employment shall never be treated as supply of services or supply of goods.
  • Employer and employee are related persons as per section 15 of the CGST Act, 2017.

Employee Reimbursement – Purchase from Registered Dealer

A registered dealer is one having a GST registration number when expenses are incurred by an employee on behalf of the employer in terms of purchases from a registered dealer, GST would not be applicable on the money reimbursed by the employer to employee.

 Following transactions must have these characteristics:

  • The expenses incurred by employees are for the furtherance of the business of the employer.
  • Expenses are incurred by the employee in the course of or in relation to employment, and expenses are reimbursed by the employer.
  • The supplier has issued or charged GST on such services. The tax invoice contains the name and GSTIN of the employer as a recipient.

If all of the above conditions are satisfied, Then the employer will be eligible to avail of the Input Tax Credit of the GST paid by the employee.

Employee Reimbursement – Purchase from Unregistered Dealer

An unregistered dealer is one who doesn’t have GST registration. In such cases, the supplier would not have charged GST on the supply of goods or services as well.

Even for purchase from unregistered dealers, the expenses incurred by the employee in the course of or in relation to his employment will be reimbursed and such reimbursement shall not attract any GST on that amount.

However, when services are provided by an unregistered dealer to the employee who is merely receiving the service on behalf of the employer then in such cases provisions of reverse charge mechanism would apply.

Reverse Charge on Employee Reimbursement

Section 9 (4) of the CGST Act, 2017 states that:

Where a supply of taxable goods or services or both, by an unregistered supplier, is made by a person who is registered then the transactions shall be covered under Reverse Charge Mechanism. And in the case where RCM is applicable then the tax liability shall be paid by the recipient of supply who is a registered supplier under GST.

Hence, when an employee incurs expenses on behalf of the employer then the employee is simply acting as an agent of the employer, and hence as per section 2(93) of the CGST Act, 2017 the employer the principal would be considered as the recipient’.

Thus when an employee has incurred any expense on behalf of the employer, the recipient of the service would be the employer. Further, if such services are received from an unregistered dealer, the employer would be liable to pay GST under reverse charge mechanism on such transaction.

Gift to Employee under GST

As per Section 7 of the CGST Act, gifts not exceeding 50,000 in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.

The 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 donee, and accepted by or on behalf of the donee.

Hence it can be concluded that anything given voluntarily without any consideration can be considered as a gift. Therefore, reimbursement of personal expenses of employees can in special circumstances be considered as a gift and should not be subject to GST if the value is less than 50,000 in any financial year.

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