SHRM India: GST Impact on Salaries, Compensation, Benefits, and Hiring

Sep 25, 2017
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SHRM India: GST Impact on Salaries, Compensation, Benefits, and Hiring

2017 will probably go down in the history of Indian Tax regime as a year of reform. This year, from 1 July 2017, the government introduced GST – Goods and Services Tax. This is a new comprehensive indirect tax that has replaced the indirect taxes like service tax, octroi, central excise duty, and VAT.

GST, which was under consideration and discussion since 1999, is expected to simplify the tax structure, create ease in logistics, increase the government tax revenue, and make tax evasion difficult. It is expected to have a huge impact on businesses of all scales.

Will It Impact Salaried Employees?

GST does not cover income tax – and so does not have a direct bearing on salaried employees and organization's compensation and benefit programs, but it can affect certain parts of it. The perks, gifts, and subsidies – travel, food, and other subsidized amenities, given to employees which are not a part of their official CTC will be covered by GST. Explaining the impact of GST on salaries or perks given by an employer to its employees Pushkar R Bagmar (PB), MD, SKP Tricor Corporate Services Pvt. Ltd, shared "Employment services received by an employer from its employees have been kept outside the ambit of GST, as provided under Schedule-III of CGST Act, 2017.  All the services provided by an employee to his employer which are within the scope of his employment contract will always be outside the ambit of GST and within the ambit of income tax. Services which are provided to the employer on principal to principal basis as an individual (i.e. part time Gym trainer services apart from normal employment services), could attract GST."

"There are a few transactions like Notice pay recovery, Director sitting fees, etc. which earlier had a service tax exposure of 15%, will continue to have an exposure of 18% under GST. Apart from the above, the GST legislation has introduced a special new provision which mandates employers to levy GST on all 'Gifts' given to employees with a cap of INR. 50,000 per employee per year. Any Gift given below the said limit will be considered outside the ambit of GST. For instance, 'Diwali Gift' given to an employee worth INR. 45,000, will not trigger a GST liability for employer, however if the said Gift was worth INR. 55,000, GST liability would get triggered on the whole amount (i.e. 55,000).", he further added.

Since certain aspects of the "perks and gifts" will be impacted by GST, the HR may have to revisit this aspect. "GST will impact salary negotiations with respect to planning and provision of 'Gift' for employees. The definition of 'Gift' has not been provided under GST, however we can gauge the broad contours of 'Gift' from a press release provided by the government. As understood from the said press release, we can infer that anything that forms a part of CTC would not be considered as a Gift, and hence would be outside the purview of GST", Pushkar said while talking about the impact of GST on salary negotiations.  

He also added that “the HR professionals will have to be mindful about the fact that most of the compensation and benefits passed on to the employees are foreseen at the very start of the employment and are inked in the employment contract itself, the salary negotiation will be affected accordingly. For example, any gadget / laptop provided by company to its employees on lease basis, once brought within the purview of CTC, shall be outside the outside the purview GST. Conversely, if the said lease is not within the purview of CTC, then GST may be levied on the same”

“The compensation to employees in the form of money is not a supply. However, fringe benefits are supply of goods or services and are liable to tax if not exempted. These are transactions in furtherance of business and even if supplied without consideration, the
same are deemed supply.”
Source: CBEC

The impact on perks and gifts will, to a certain extent, affect how the compensation and benefits are calculated. Throwing some light on how GST will change the comp & ben calculation and what HR needs to take into account, Pushkar shared "Many components that form a part of compensation and benefit like travel benefits, free food vouchers, club membership, etc. enjoyed by the employees have an indirect tax exposure. Thus a change in indirect tax rates will lead to a change in compensation and benefits. For instance, effective tax liability on radio taxis reduced from 6% under service tax to 5% under GST, this shall affect the reimbursement limits for conveyance by 1%-2%. Similarly, an increase or decrease in any underlining service will have a trickledown effect on the compensation or benefit limits for the said service as well."

Discussing the replacements in the perks, amenities, and gifts part of compensation and benefit, Pushkar said that "As explained above, 'GIFTS' provided by employer to employee, beyond the prescribed limit (i.e. INR. 50,000) are liable for GST, however any extra 'Bonus' in lieu of 'Gift' provided in 'Cash / Credit' would always be outside the purview of GST. According to the GST Legislation, 'Money' has been specifically excluded from the definition of both goods and services, and thus any 'Bonus in Money' (and not Gift) given to employees will always remain outside the scope of GST. HR can accordingly structure their perquisites in a manner that they are majorly passed on through monetary benefits or ensure that Gifts beyond the CTC are limited to INR. 50,000 per employee per year."

Does GST Impact Contract Workers, Part-time Employees, and Freelance Consultants?

While it is clear that the regular salaried jobs will not be much affected by GST, it is also important to take into account other types of employment like - contract employees, freelance consultants and part time workers. We asked Pushkar to shed some light on whether this section of the workforce will be impacted by GST, "Contract/part time employees and freelance consultants generally work on principal to principal basis and their services are normally not confined within the employer-employee relation. Services of such consultants are not be covered under schedule –III of GST. Thus, like the current service tax regime, GST will also be levied on services availed from such part time consultants", he shared.

Apart from the contract employees, the following services will also come under the gambit of GST, Pushkar shared "Those HR function that have a direct GST exposure like procurement, Insurance, canteen expenditure, transportation, etc. will majorly face a working capital impact due to a change in rate of taxes under GST as compared to the current tax rate. The other functions like perquisites, reimbursements, etc. will have an indirect impact due to GST, as reimbursements limits and compensation limits will change basis the underlying perquisite, as explained above."

Here's What the HR Can Do to Make the Transition from the Old Tax Regime to the GST System Easier

GST is new, it is complicated, and it has a far reaching impact. Employees, even if they're not affected to a large extent, will have queries related to it. HR needs to ensure that they are prepared to address the concern and questions that employees may have, especially with regards to their salary and perks. Like Pushkar shared, "There are several transactions (i.e. Notice pay recovery, Director sitting fees, Sale of Assets to employees, Gifts above INR. 50,000, etc.) between and employer and employees which tend to have a GST exposure. The HR will need to ensure that the employees are made aware about the same. There could be specific cases where the employee may provide services to their employer on principal to principal basis as an individual (i.e. part time Gym trainer services apart from normal employment services), which could attract GST. So, while addressing queries on GST, the HR will have to first identify whether the service provided by the employee is within his scope of employment or not, and if the said service is beyond his scope of employment, then the said transactions may have an exposure of GST. Secondly any query apart from the identified list of queries should be handled with consultation of the tax expert / team."

The HR can also take the following steps suggested by Pushkar for a smooth transition from the current tax regime to the new GST system.

"The HR can do the following things to ensure a smooth transition from the old tax structure to the new one where it is applicable", Pushkar said while outlining the steps that HR can take:

  • Conduct GST awareness training for employees highlighting the changes in their CTC and salary structure due to introduction of GST

  • Ensure most of the perquisites / compensations are brought within the ambit of CTC.

  • Ensure that value of Gifts to employees is kept below the taxable limit of INR. 50,000

  • Configure the IT system to 'Red flag' an employee when Gifts given to the specific employee exceeds INR. 50,000 and ensure disbursement (payment of GST liability to the government) of GST as per the GST legislation.

  • Revise procedures for employee reimbursements to enable the company to claim GST credit on the same. Following factors are to be considered while making new reimbursement procedures:

    • Invoices issued by vendor for travel, telephone or hotel expenses etc. meant for employees, should be raised against the GSTIN of the Company, in order to claim credit of such expenses

    • Employees shall be instructed to provide Company's GSTIN to vendors

    • Employees shall submit such vendor invoices with the company within the same month or at least before 10th of the succeeding month.

For detailed information on the new tax, clarifications, and updates check the GST section on the Central Board of Excise and Customs website. 

We thank Pushkar R Bagmar (PB), MD, SKP Tricor Corporate Services Pvt for helping address our queries regarding GST.

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