GST is not applicable on the recovery of joining bonus, retention bonus, work from home allowance, if the employee exits before serving the pre-agreed period

Facts of the Case:-  The applicant is involved in software development, maintenance services, and ITES, serving both domestic and overseas customers. The retention bonus is provided to retain employees for a predefined period. If an employee exits the organization or changes roles within the stipulated time, the bonus is recovered. This recovery is viewed as equivalent to reclaiming advanced salary, not as consideration for any service rendered by the employer. Similar to the retention bonus, a joining bonus is provided as an incentive to join and remain in the organization for a predefined period. A one-time Work From Home (WFH) allowance was provided due to COVID-19 for setting up home office infrastructure. Further, Financial assistance is provided to employees for job-related professional development. If an employee exits within 12 months of certification, the reimbursement is recoverable

Issues:- The applicant, an employer, sought an advance ruling on whether GST is applicable on the recovery of various bonuses and allowances from employees who leave the organization within a stipulated period. These include:

• Retention Bonus
• Joining Bonus
• Work from Home (WFH) Allowance
• Tuition Assistance Program (TAP) expenses

Contention of the Applicant:-  The applicant contends that the recovery of these amounts does not involve any service provided by the employer to the employee. The contractual relationship between employer and employee primarily concerns the provision of employment services, not the recovery of bonuses or allowances. Further, contended that these recoveries are compensatory, aimed at dissuading early exits and compensating for disruption or inconvenience caused by the premature termination of the employment contract. The primary intent is not to earn consideration through these recoveries.

The applicant cites the education guide and CBIC clarifications, which suggest that penalties or fines for contractual breaches are not considered as consideration for services. The applicant relies on Circular No. 178/10/2022-GST, to argue that recoveries for premature termination or bond forfeiture are not taxable. The circular clarifies that such recoveries are penalties to deter non-serious candidates and are not considered consideration for tolerating an act or situation.

The applicant also refers to various judicial decisions and advance rulings that support their view that such recoveries should not be subject to GST.

Rulings:- The AAR noted that Circular No. 178/10/2022-GST, clarifies that amounts forfeited or recovered for leaving employment prematurely are not taxable under GST as they are not considered a consideration for tolerating an act but rather a penalty to discourage premature exits. Also, Circular No. 172/04/2022-GST, states that perquisites provided by the employer to employees as part of a contractual agreement are not subject to GST as they are in relation to the employment.

The AAR ruled as under:

1. Retention Bonus: Offered to incentivize employees to stay longer. Recoverable if the employee exits voluntarily within a stipulated period. GST is not applicable on the recovery of these bonuses if the employee exits before serving the pre-agreed period.
2. Joining Bonus: A one-time bonus paid upon joining. Recoverable if the employee leaves within a predefined period from the date of joining. GST is not applicable on the recovery of these bonuses if the employee exits before serving the pre-agreed period.
3. Work From Home Allowance:  Provided to set up a home office. Recoverable if the employee exits before serving the stipulated period from the payout date. GST is not applicable on the recovery of this allowance if the employee exits before serving the pre-agreed period from the payout date.
4. Tuition Assistance Program (TAP):  Financial assistance for further education relevant to the employee's job role. Recoverable if the employee exits within 12 months from the date of certification. GST is not applicable on the recovery of amounts paid under the TAP policy if the employee exits before serving the pre-agreed period in the organization.