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Employees are not required to pay GST on allowances



Tax body clarifies, employees will not have to pay GST on allowances

The Central Board of Excise and Customs (CBIC) has clarified that allowances paid by employers to employees are not subject to Goods and Services Tax (GST).

As per a recent circular, services rendered by an employee to the employer in the course of employment shall not be deemed to be a supply of goods or services.

This is one of the many clarifications given by CBIC regarding implementation of the decisions taken by the GST Council in its recent meeting in Chandigarh last week.

The circular states, “Perquisites provided by the employer to the employee in respect of the contract between the employer and the employee shall not be subject to GST when it is provided in the context of the contract between the employer and the employee.”

The applicability of GST on allowances was in dispute for a long time because previous rulings and clarifications stipulated the principle that a transaction between two persons would still attract GST, even if there was no consideration involved.

The clarification issued by the government clearly follows the industry’s argument that GST cannot be applied to allowances as they are regulated by employment contract, which is protected from GST as per Schedule III of the GST Act 2017.

Several litigations were pending regarding the implementation of GST on allowances to employees. This clarification of CBIC will pave the way to clear the confusion. Allowances are non-cash benefits such as transportation, healthcare, insurance or canteen services offered by employers to employees.