Indian Court: Notice Period Buyout Without Proper Notice is Not Taxable

According to a recent court ruling by the Bangalore Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT), “notice period pay” to an employer after an employee resigning without giving requisite notice is not taxable.  

In India, notice period is the duration an employee must continue working for the organization after they officially resign. Employees can leave without serving the notice period with a notice-period buyout. Essentially, the employee’s salary for the notice period needs to be given back to the employer. If an employee leaves the organization without serving or buying out the notice period or without providing a proper notice, an employee can be declared ‘AWOL’ (Absent without Official Leave) or ‘Absconding’. 

In this case, the CESTAT decided that the term 'notice pay' mentioned in the employment contract cannot be considered as a service, more specifically as a taxable service, as neither of the parties to the contract have provided any service to each other. Therefore, the phrase "service" defined in Section 65 of the Finance Act of 1994 is not applicable for consideration of such activity as a service for the purpose of levying service tax.