Employer - Employee Transactions. July-2017

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1 Employer - Employee Transactions July-2017

2 The tax position and interpretations contained in this presentation are based on current law, its understanding and interpretation ANAR & Co., Its Partners, Affiliates and Team, etc., do not accept any responsibility and/or liability arising out of actions / decisions based on this presentation The said presentation is mean for circulation to Clients of ANAR & Co. only Clients are requested to consult giving all necessary information and documentation, the aspects covered in the presentation, being generic in nature

3 Supply from Employer to Employee: Where gift up to value of INR 50,000 is provided by employer to employee in a financial year, same would not qualify as supply. The term gift has not been defined in the law. In case there are other supplies made by employer to employee (with or without consideration), the same may qualify as supply. Supply from Employee to Employer: Same would not be treated as supply provided the same is in course of or in relation to the employment. Since employer and employee have been deemed as related person under C Act(Section 15), valuation for supplies which are taxable under are to be governed in terms of the Valuation Rules issued for related party transactions (discussed in subsequent slide).

4 Broad principles for analyzing whether a transaction between employer and employee would be liable to or not Any facility which is common to all employees (and there is no identified employee/ customer such as free tea/ coffee etc. in office) should not be liable to Any facility provided for official usage by employee in the normal course of employment (such as office laptop, parking etc.) should not be liable to Reimbursements to employee (such as mobile bills etc.) is not a supply per se by employer to employee and hence, should not be liable to Any other supplies by employer which is not in normal course of employment need to analysed on case to-case to determine applicability of

5 Specific order to be followed Open market value Full value in money for supply of goods at the same time of transaction between two unrelated parties where price is sole consideration Value of supply of goods of like kind and quality Supply of goods under similar circumstances in respect of characteristics,quality, quantity, functional components, materials and reputation of goods Cost plus basis 110% of cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services. Residual method Reasonable means consistent with the principles and general provisions of Section 15 of C Act and the Valuation rules

6 Transactio ns transaction Applica ble Likely implications Credit availability to Medical insurance for employees and family members offers medical insurance to its employees and their family members charges are recovered on account of medical insurance from employees This is covered in the employment manual for the employees which form part of the employment contract liability since there is no underlying supply per se by the company to its employees In the agreements/ contracts with the medical insurer it should be clearly provided that company is merely making payment on behalf of its employees Supply is made by insurance directly to the employee and not to company and hence, no credit availability Further, taxes paid on expenses incurred in relation to employee health insurance (unless notified as obligatory under any law) are not eligible as credit Personal accident insurance offers personal accident insurance to its employees charges are recovered on account of such insurance from employees liability since there is no underlying supply per se by to its employees (and there is no identified employee to whom supply is made) Supply is made by insurance directly to the employee and not to company and hence, no credit availability Further, taxes paid on expenses incurred in relation to employee life insurance (unless notified as obligatory under any law) are not eligible as credit

7 Transactions transaction Applicable Likely implications Credit availability to Health check up facility offers annual health check facility to its employees within office premise liability since there is no underlying supply per se by the to its employees (and there is no identified employee to whom supply is made) Taxes paid in relation to health services should not be eligible as Credit Provision of subsidized or free food All employee event Lunch for employees women s day, Diwali etc. arranges catering services for serving food at free of cost to its employees on fruits, women s day lunch etc. In certain cases, partial amount may be recovered from customer s and balance payment made by Yes can explore the possibility of structuring the contract with caterer to the effect that the caterer is supplying food directly to the employee (and may also recover subsidized value from the employee) and raises invoice on the for recovery of the amount. In such a case, liability should ideally not arise on the Taxes paid on outdoor catering would be available as credit where discharges on outward supply to the employee at open market value, otherwise the same would be a cost

8 Transactions transaction Applicable Likely implications Credit availability to Health check up facility offers annual health check facility to its employees within office premise liability since there is no underlying supply per se by the 1 to its employees (and there is no identified employee to whom supply is made) Taxes paid in relation to health services should not be eligible as Credit Provision of subsidized or free food All employee event Lunch for employees women s day, Diwali etc. arranges catering services for serving food at free of cost to its employees on fruits, women s day lunch etc. In certain cases, partial amount may be recovered from customer s and balance payment made by Yes can explore the possibility of structuring the contract with caterer to the effect that the caterer is supplying food directly to the employee (and may also recover subsidized value from the employee) and raises invoice on the for recovery of the amount. In such a case, liability should ideally not arise on the Taxes paid on outdoor catering would be available as credit Where discharges on outward supply to the employee at open market value, otherwise the same would be a Cost

9 Transactions transaction Applicable Likely implications Credit availability to Free cab or subsidized facility Car facility- Pick up and Drop from home to Office Provides cab facility at free of cost to its Employees In case not covered in employment contract liability to arise since the transaction would be treated as supply by employer to employee. Being a related party transaction (and employee not eligible to claim input tax credit), would need to be paid as per the open market value (which may be considered as the amount paid by to transporter) Taxes paid on cab expenses would be available as credit where company discharges on outward supply to the employee at open market value, otherwise the same would be a cost

10 Transac tions transactio n Applicabl e Likely implications Credit availability to may explore possibility of structuring the contract with transporter to the effect that the transporter is supplying cab services directly to the employee and raises invoice on company for recovery of the amount. In such a case, liability should ideally not arise on since there is no underlying supply per se by company to employees in case not covered in employment contract Considering the same is part of employment contract and is provided as part of contractual obligation, the same should not be subject to liability In light of the rate schedule for services, tax rate of 5% on rent-a-cab services is applicable with condition of no input tax credit.however, in terms Act (Section 17), credit of rent a- cab can be availed when the same is used for making outward supply of same goods or services. Accordingly, credit may not be allowed in case where tax is paid on outward supply at the rate of 5%.

11 Transactions transaction Applicable Likely implications Credit availability to Mobile handsets given to employees provides mobile handsets to its employees for official Purposes liability since such benefits are extended by to employee for official use/ purposes Taxes paid on procurement of mobile handsets would be available as credit since such goods are used in course or furtherance of business Mobile phone entitlements Specified employees are eligible to claim reimbursement of mobile phone bills (basis eligibility criteria) liability on reimbursements made to employee since there is no underlying supply per se by to its employees t applicable since invoice would not be in name of Process may be defined by the company for claiming credit in case of Reimbursements

12 Transaction s transaction Applicab le Likely implications Credit availability to Relocation benefits In case of any employee relocation, company reimburses travel related expenses and also incur certain expenses in relation to transportation of household goods of employee, etc. liability since such benefits are extended by to employee for official use/ purposes Taxes paid on travel/transportation expenses (other than those which are specifically not allowed) likely to be available as credit since such services are used in course or furtherance of business - Process may be defined by the for claiming credit in case of Reimbursements Temporary Accommod ation for first few weeks of Joining provides temporary accommodation to its employees in the first few weeks of joining liability since such benefits are extended by company to employee for official use/ purposes input tax credit will be available as used by the employee for personal consumption

13 Transactions transaction Applicabl e Likely implications Credit availability to Recovery on account of loss of ID cards/ other Assets recovers charges from employees through payroll deduction in case of loss of any asset (such as ID cards, laptops etc.) by the employee Such recovery may be treated as recovery of liquidated damages and hence, should not qualify as supply liable to t applicable Sale of used laptops (capitalized in the books) Used laptops are given by to employees on FoC basis or at subsidized value Yes Such transaction to be treated as supply and accordingly, liable to Open market value (being a capital goods/ asset) would be treated as the higher of amount of credit availed (as reduced by 5% per quarter from the date of underlying input invoice) or the tax on transaction (sale) value t applicable

14 Transactions transaction Applicab le Likely implications Credit availability to Gifts to employees - Diwali or other occasion (such as farewell) - T-shirts, stationery, miniatures, etc Gifts such as T- shirts, stationery, momento, car models,trophies,etc are distributed to Employees on Diwali, farewell or other Occasions Yes payable in case value of gifts provided to an employee during a FY exceeds INR 50,000 Open market value to apply. Tax to be paid where total value exceeds INR 50,000 For instance: 1) In case individual gifts given during a FY exceeds INR 50,000 (sayinr 55,000), to be paidon INR 5,000. 2) In case single gift exceeding INR 50,000 (say INR 55,000) given to employee, should be applicable on full INR 55,000 to track gifts given to individuals during FY to calculate applicable Liability Requirement of reversal of input credit, if availed because of specific exclusion

15 Transacti ons transaction Applic able Likely implications Credit availability to car given to employees provides car to its employees for both personal and official purpose (remains as asset in books) liability on car provided to employee, as it is made in the course of employment (part of employment contract). Hence, there is no underlying supply per se by credit should be available of the paid Car lease scheme Car obtained on financial lease by the from dealer and given to employees for official use. Car is recorded as an asset in 's books Amount equivalent to car entitlement is reduced from the basic salary of the employee. tional amount is added as perquisite in employees' CTC liability since such benefits are extended by company to employee for official use/ purposes (the underlying employment contract should also substantiate the same) Since the has purchased the car, in light of specific restriction on credit eligibility for motor vehicles, tax paid on procurement of motor vehicle should not be eligible as credit to company

16 Transactions transaction Applicab -le Likely implications Credit availability to Employee referral policy Cash allowance to be given for successful reference.tds is deducted liability since consideration (viz. referral bonus) paid by is towards services provided by employee in the normal course of employment (on which applicable Income tax is also deducted at the time of payout) t applicable tice pay recovery recovers notice pay charges through payroll deduction in case of early relieving of the employees Debat able Matter tice pay recovery is an issue under current Service tax regime and may continue to remain an issue under regime However, considering that the same appears from contractual obligation, a position may be taken that no should be charged on the same needs to appropriately word the same in employment manual t applicable

17 Transactions transaction Applicable Likely implications Credit availability to Long Service Awards On Completion of specified years-gifts or money in payroll is given to employees by. TDS borne by employer liability since such benefits are extended by to employee for official use/ purposes Further, income tax is also borne by the employee on such expenses t applicable House lease offers house lease facility to specified employees. pays rent, security deposit, brokerage, etc. to the landlord and recovers rent paid from employees through payroll deduction t applicable since rental of residential property is exempt from. t applicable since rental of residential property is exempt from

18 Transactions transaction Applicable Likely implications Credit availability to Employee welfare schemes (such as offsite / town hall, etc) allocates certain amount for each employee in relation to recreational activities (such as offsite, town hall, etc) liability since there is no underlying supply per se by company to its employees Taxes paid on procurement of goods/ services in relation to town hall/ offsite activities should be available as credit to provided goods/ service are not specifically restricted (e.g. food and beverages) Free use of company own products including uniform, shoes, etc provided for free of cost basis We understand that this is covered in the employment manual for the employees as well liability since such benefits are extended by company to employees for official use/ purposes Taxes paid on procurement of uniforms should be available as credit since they are used in course or furtherance of business and not used by employees for personal consumption

19 Transactio ns transaction Applicable Likely implications Credit availability to Products supplied at discounted rates to employees Employees are entitled to buy products at discounted Prices Yes Such transaction to be treated as supply and accordingly, liable to Being a related party transaction (and employee not eligible to claim input tax credit), would need to be paid as per the open market value t applicable Free Gym/ Crèche facilities provides free gym/ crèche facility to employees without recovery of any amount liability since such benefits are extended by as a common facility to all employees in general (and there is no identified employee to whom supply is made) Taxes paid on procurement of goods/ services in relation to gym/ crèche should be available as credit to provided goods/ service are not specifically restricted (e.g. food and beverages)

20 Transactions transaction Applicable Likely implications Credit availability to Leave Support Employees are eligible for of earned leave, sick leave and casual leave liability since there is no underlying supply per se by company to its employees t applicable Support towards corporate education Employees are eligible to claim reimbursement up to a certain amount for pursuing corporate education liability on reimbursements made to employee since there is no underlying supply per se by company to its employees t applicable

21 Various expenses are claimed by employees such as: Travel expenses Telephone expenses Hotel expenses For to avail credit, invoices issued by vendor for travel, telephone or hotel expenses etc., should provide correct IN of Employees should be instructed to provide s IN to vendors Vendor to issue invoice in the name of Necessary modifications to be made in system to ensure employees : Enter necessary information (such as invoice number, invoice date, IN of vendor, taxable value, tax amount etc.) at the time of claiming expense reimbursements Same should be verified at the time of processing of claims

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