Forfeiture of Security Deposit by Employees - Liability to pay Service Tax - DGCEI MO Circular

By Vijay Kumar

DURING the course of investigation against a Company, DGCEI noticed that the Company is forfeiting security deposits given by the employees as they could not comply with the terms of employment like leaving the organization without giving stipulated notice or completing the bond period. To the DGCEI, it appeared that the activity of forfeiture of a security deposit given by the employee is a taxable service under the provisions of Section 66E (e) of the Finance Act, 1994.

As per Section 66E of the Finance Act, 1994, the following shall constitute declared services, namely:-

(a),(b),(c),(d),...

(e) Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.

The DGCEI feels that:

1. The activity of entering into an agreement by the employer with the employee to allow him to forfeit the security deposit or paying some charges/expenses/fee etc., in case of his leaving the employment without giving stipulated notice or completing the bond period, appears to be covered under the declared services of, "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act".

2. These services are being provided by the employers to its employees and consideration in terms of forfeiture of security deposit or other payments is being received by the employers in lieu of these services. Hence Service Tax would be leviable on employers for providing these services.

3. The recovery of an amount, in terms of forfeiture of security deposit or other payments, from employee for leaving the organization as stated above is a common phenomenon in business organizations.

DGCEI has communicated this Modus Operandi to all the Chief Commissioners to be brought to the notice of the field formations under their charge for taking necessary action in similar cases. Action taken and results achieved in this regard has to be communicated to the Directorate General.

Incidentally, we had carried an article on this very issue titled 'Notice Pay' charcha - Service Tax Implications by CA Pritam Mahure earlier this year.