Exclusion of Employer share of EPF/ ESI from Value of Supply - Analysis of recent WB AAR Ruling

[Dinesh Singhal]

West Bengal Authority for Advance Ruling (‘AAR’) in the case of IN RE: M/S. EX-SERVICEMEN RESETTLEMENT SOCIETY [2019 (12) TMI 165 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL] has ruled that Sub-sections (2) and (3) of Section 15 of CGST Act leave no room to deduct any amount like management fee, employer contribution to PF/ ESI etc from the value of supply and thus GST is payable on total value of supply including these heads. Captioned ruling has been analyzed in this update.

A. FACTS OF THE CASE

• The Applicant is a registered society providing security and scavenging services to different medical colleges & hospitals etc.
• The Applicant is charging GST @ 18% on total value of supply including minimum wages, Employer share of EPF & ESI contribution. However certain colleges/ hospitals have raised the issue that GST should only be applied on management fee/ service charges and not on EPF/ ESI portion.

B. QUESTIONS BEFORE THE AAR

• Whether GST to payable on Management Fee/ Administrative charges only or otherwise complete billing amount?
• Whether employer portion of EPF & ESI amount of the bill are exempted for paying GST?

C. CONTENTION OF THE APPLICANT

• Applicant has submitted that few hospitals have raised objection that employer portion of EPF & ESI are deposited to respective authority, so the amount of EPF & ESI should be exempted from paying GST.

D. RELEVANT LEGAL PROVISIONS REFERRED

• Section 15 (1) of CGST Act, 2017 - The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
• Section 15 (2) of CGST Act, 2017 - The value of supply shall include-

(a)   any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;

(b)   any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;

(c)   incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;

(d)   interest or late fee or penalty for delayed payment of any consideration for any supply; and

(e)   subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.

Explanation–For the purposes of this sub-section, the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.

• Section 15 (3) of CGST Act, 2017 - The value of the supply shall not include any discount which is given-

(a)   before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b)   after the supply has been effected, if-

(i)   such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

(ii)  input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.

E. OBSERVATION AND RULING BY THE AAR

• AAR stated that sub-section (2) of section 15 clearly specifies the elements that will form a part of value of supply and sub-section (3) of section 15 provides the exclusions from the value of supply.
• AAR mentioned that aforesaid provisions, leaves no room to deduct any amount like management fee, employer portion of EPF & ESI for the purpose of determination of value of supply under section 15 of GST Act and thus tax would be leviable on the total bill amount.

AAR finally ruled as under on the stated questions:

i. GST is payable on total value of supply.

ii. Employer portion of EPF & ESI amount of the bill are not exempted for paying GST.

F. Our comments

In this ruling, AAR has outlined that since there are specific clauses in GST Act providing inclusion & exclusion from the value of supply, thus there is no scope to exclude any charges unless covered in given exceptions. Earlier Karnataka AAR in IN RE: M/S. KSF-9 CORPORATE SERVICES PVT. LTD [2021 (2) TMI 198 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA] has also given a similar ruling stating that the value of taxable supply of manpower services is the transaction value equivalent to the bill amount which is inclusive of actual wages of the manpower supplied and the additional 2% amount paid to the applicant.

It needs to be noted that applicant has paid the EPF/ ESI contribution in respect of his own employees and there is no case of reimbursement or Pure Agent. Hence, GST need to be discharged on the total billing amount inclusive of all charges unless they are specifically excluded under section 15(3) of GST Act.  

 

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