Chosen theme: Understanding GST in Payroll for Indian Companies. Navigate what GST touches in payroll, what it absolutely doesn’t, and how finance, HR, and compliance teams can stay coordinated without slowing down your people operations. Subscribe for future deep dives and share your payroll GST questions with us.
What GST Touches—and What It Doesn’t—in Payroll
Under GST in India, services by an employee to the employer in the course of employment are not treated as a supply. That means salary, wages, and most contractual employment payments are outside GST. Keep employee compensation cleanly separated in your books to avoid confusion and misclassification.
What GST Touches—and What It Doesn’t—in Payroll
If an employer recovers amounts from employees for facilities such as meals or transport, the treatment depends on facts: whether it is obligatory by law, whether the employer acts as a pure agent, and whether any margin exists. Document contracts, policies, and invoices to justify your position and keep auditors satisfied.
Employee Perquisites, Recoveries, and Reimbursements
Canteen, transport, and welfare payments
Where an employer offers canteen or transport and recovers a nominal sum, GST applicability often hinges on legal obligation, pricing without margin, and vendor invoicing. Maintain policy documents and board approvals, and keep recovery equal to actual cost where you aim for a pure pass-through approach.
Out-of-pocket reimbursements as a pure agent
True reimbursements can fall outside the value of supply when the employer acts as a pure agent. To defend this position, invoices must be in the employer’s name for employee use, with costs recovered at actuals, and your contracts must explicitly describe the pure agent role. Sloppy paperwork can undo a good tax position.
Notice pay, bonds, and damages
Payments like notice pay recovery or training bonds trigger debate on whether they are consideration for a supply or compensation for breach. Case law and departmental guidance have evolved. Anchor your stance in employment contracts, policy wording, and consistent accounting, and consult advisors for high-stakes cases.
Input Tax Credit (ITC) on Employee-Related Costs
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Food and beverages, club memberships, health and life insurance are generally blocked for ITC. However, where the employer is legally required to provide them, or the same category is supplied onward, credits may be available. Capture the legal basis, HR circulars, and statutory references alongside every invoice.
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Payroll software subscriptions, HRIS, compliance consulting, and payroll outsourcing typically support taxable business activity and can be eligible for ITC. Ensure the GSTIN, HSN/SAC, and place-of-supply are correct, the vendor is compliant, and the invoice appears in your GSTR-2B before availing credit.
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Tie each ITC claim to a clear business purpose and a policy note explaining why it is eligible. Cross-reference invoice numbers to cost centers, attach contracts or statutory obligations, and keep a monthly sign-off. Share your checklist with peers below—what steps keep your credits clean and defensible?
Director services: employee vs independent
Where a director functions as an employee, salary is outside GST. Services by independent directors are typically covered under RCM, with the company paying GST. Clear board resolutions, contracts, and payroll classification prevent confusion and ensure RCM is applied only where appropriate.
Security and manpower nuances
Security and manpower supply can involve special RCM rules depending on the supplier’s legal status and notification coverage. Payroll teams should coordinate with procurement to map each vendor correctly, so you neither miss RCM liabilities nor overpay GST under forward charge unnecessarily.
Legal, transport, and other support services
Legal services and certain logistics arrangements may invoke RCM and influence your overheads touching payroll. Maintain an updated matrix of RCM services, rate cards, and responsible owners for payment and reporting. Share your RCM playbook with readers—what controls keep your month-end steady?
Secondments, Deputation, and Cross-Border Nuances
If control, supervision, and payroll risks sit with the Indian entity, treatment may align with an employer–employee relationship locally. If the foreign affiliate remains the real supplier of manpower, GST can apply on the recharge. Contracts and day-to-day reality must tell the same story.
Secondments, Deputation, and Cross-Border Nuances
Intercompany recharges may attract IGST based on place-of-supply rules and the nature of services. Align your intercompany agreements with operational facts, obtain correct invoices, and assess whether export or import of service conditions are met. Small inconsistencies can snowball into assessments.
Controls, Documentation, and Audit Readiness for Payroll GST
Separate salary, perquisites, recoveries, and vendor services into distinct GLs. Tag GST-relevant entries with invoice references and cost centers. This structure turns audits into walkthroughs rather than investigations and makes analytics for cost control straightforward and defensible.
Controls, Documentation, and Audit Readiness for Payroll GST
Write short policies for canteen, transport, reimbursements, and gifts. Define when GST applies, when ITC is claimed, and who signs off. Train HR, payroll, and admin teams so daily actions match the policy. Invite your colleagues to subscribe—next week we share a ready-to-use policy checklist.
