One of the disputed areas under GST is “Taxability of the benefits extended by the employer to their employee”. Canteen facilities are often arranged by the corporates for their employees which is generally run by a third party to comply with the legal obligation as mandated by the Factories Act, 1948. These expenses are borne by the employer for the benefit and upliftment of the employees. An attempt has been made to understand the nature of this transaction under different scenarios by analysing it under the legal provisions provided under the GST law.
The canteen facility is often provided by a third party and a nominal amount is recovered by the employer from the employees.
Taxability as to whether the transaction of recovering nominal amount from the employees by the employerwill qualify to be “Supply” under the GST regime
Levy of GST arises if a transaction qualifies to be a supply and under the GST law the ambit of the word “supply” is wide enough to cover a wide range of activities and it is an inclusive definition.
Section 7(1) (c) of the CGST Act, 2017, states that the expression “supply” includes-
…(c) The activities specified in Schedule I, made or agreed to be made without a consideration…
Activities to be considered as supply even if made without consideration are provided in the Schedule I of the CGST Act, 2017. Thus, even if no consideration is received by the supplier these specified activities will be considered as supply.
It is important to take a note of Entry no. 2 of schedule I of the CGST Act, 2017 which is as follows:
Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business.
Explanation to Section 15 of the CGST Act, 2017 states that person shall be deemed to be a related person if they are employer and employee. Thus employer and employee of an organization are related to each other.
Canteen facilities provided by the employer to the employees will fall under the definition of supply in both the cases whether it is for a consideration or without the consideration. In other words irrespective of whether the company recovers any amount from the employees or the company provides the canteen facility free of cost, in both the cases the transaction will be covered under the definition of supply.
CBIC issued a press release dated 10-07-2017 to provide clarity on taxation of perquisites provided by the employer to the employees. In the press release it was stated that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee (part of salary/ CTC), will not be subjected to GST.
There might arise a confusion in the minds of the readers after going through Schedule III to the CGST Act, 2017 which provides a list of activities or transactions which shall be treated neither as a Supply of Goods nor a Supply of Services.
Section 7(2)(a) read with Entry No. 1 of Schedule III of the CGST Act, 2017 specifically provides that ‘Services by an employee to the employer in the course of or in relation to his employment shall be treated neither as a supply of goods nor a supply of services’.
The above discussion is summarized below:
| Services by Employee to employer | Schedule III i.e., No supply No GST |
| Services by Employer to employee (Part of salary/CTC) | Schedule I i.e., Supply, but no GST as per Press Release |
| Services by Employer to employee (not part of salary/CTC) | Schedule I i.e., Supply, & GST will be charged |
Thus, the services which are provided by the employer to the employee will be considered as supply and GST will be levied on these services but the next question which arises is on what Value will the tax be discharged.
Value on which GST will be discharged
As per Section 15(1) of the CGST Act, 2017, the value of supply of goods or services or both shall be the transaction value, which is the price actually paid or is payable for the said supply, where the supplier and recipient are not related and the price charged is the sole consideration.
Since the transaction of providing canteen facility is between related parties i.e., the employer and employee, the transaction value cannot be taken as the value and reference will be made to the set of rules provided by the CGST Rules, 2017.
As per Rule 28, of the CGST Rules, 2017
The value of the supply of goods or services or both between distinct persons as specified in sub-sections (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall-
- be the open market value of such supply;
- if the open market value is not available, be the value of supply of goods or services of like kind and quality;
- if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:
Thus, the open market value, if available, will be the value of supply.
Admissibility of Input Tax Credit for GST paid on canteen services
As a general rule GST paid on purchase of goods or services used in the course or furtherance of business is allowed as Input Tax Credit (ITC) to offset the liability to pay GST on the outward supply unless the same is specifically blocked under Section 17(5) of the CGST Act, 2017.
A registered person is ineligible to claim Input Tax Credit even if all the conditions mentioned in Section 16 of the CGST Act, 2017 are satisfied due to the specific provisions of Section 17(5).
As per Section 17(5)(b) of the CGST Act, 2017, ITC shall not be available in respect of following, namely:-
(b) the following supply of goods or services or both-
- food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:
Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;
- membership of a club, health and fitness Centre; and
- travel benefits extended to employees on vacation such as leave or home travel concession:
Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.
Thus, ITC in respect of the above mentioned goods and services shall not be allowed to be claimed by the registered person, since the same are specifically blocked under Section 17(5).
Whether ITC will be allowed in respect of goods or services, which are obligatory for an employer under any law for the time being in force?
In the Advance Ruling Musashi Auto Parts (P.) Ltd., In re[1] a similar question is answered.
The applicant company is a manufacturing unit of auto parts having around 2400 full-time working employees as well as contract based employees. As per Section 46 of the Factories Act, 1948, it is mandatory for every employer to provide canteen/food facilities for employees, if the number of employees are more than 250. So, the company under the mandate by law is required to provide Canteen/food facilities to employees working therein.
The applicant company recovers a nominal amount from the employees as a reimbursement of expenses. Applicant receives Inward Supply of Canteen Services for employees working in the manufacturing unit and against the same distributes coupons to employees on subsidized price to avail canteen services.
As per the above AAR the applicant is not eligible to claim input tax credit as a careful reading of Section 17(5) would suggest that proviso to Section 17(5)(b)(i) is with regard to the provision contained in Section 17(5)(b)(iii) and not Section 17(5)(b)(i).
A similar view has been taken in the case of Tata Motors Ltd., In re[2].
The applicant, with the aim to comply with the mandatory requirement of maintaining the canteen as per the Factories Act, 1948, has arranged a canteen at its factory premises for its employees, which is run by a third party Canteen Service Provider. As per the arrangement, part of the canteen charges is borne by the applicant; whereas the remaining part is borne by its employees. The said employees' portion of the canteen charges is collected by the applicant and paid to the Canteen Service Provider. The applicant does not retain with itself any profit margin in this activity of collecting employees' portion of canteen charges.
Sub-clause (i) of Section 17(5)(b) ends with a colon (:) and is followed by a proviso and this proviso ends with a semicolon (;).
Colons and semicolons are two types of punctuation. Colons are used in sentences to show that something is following, like a quotation, example, or list. Semicolons are used to join two independent clauses/sub-clauses, or two complete thoughts that could stand alone as complete sentences. That means they are to be used when you are dealing with two complete thoughts that could stand alone as a sentence.
Semicolon creates a wall to convey mutual exclusivity between the sub-clauses, in the present matter. It is obvious that the Legislature intended the said sub-clauses to be distinct and separate alternatives with distinctively different qualifying factors and conditionality.
Thus, sub-clause (i) of Section 17(5)(b) ending with a colon and followed by a proviso which ends with a semicolon is to be read as independent of sub-clause (iii) of Section 17(5)(b) and its proviso.
Thereby the proviso to sub-clause (iii) of Section 17(5)(b) is not connected to the sub-clause (i) of Section 17(5)(b) and cannot be read into it.
It was held that the input tax credit of GST paid on canteen facility is blocked credit under Section 17(5)(b)(i) and inadmissible to the applicant.
In both the above Advance Rulings a similar view of not allowing the ITC of GST paid on canteen facility is taken by the Authorities for Advance Ruling but the very intent of providing free flow of Input Tax Credit by the government for the GST paid on goods or services in the course or furtherance of business is in question by bringing this under sec 17(5) as blocked credit irrespective of the addition of the proviso stating ITC will be allowed in respect of goods or services, which are obligatory for an employer under any law for the time being in force.There are some points which are required to be noticed:
- The proviso inserted after clause (iii) of Section 17(5)(b) at first reading provides that the same is to be read after all the three clauses. If this proviso was only for clause (iii), then it should be placed exactly in the same way as the first proviso to Section 17(5)(b)(i) is placed in the Act.
- Also, the expression used by the law maker is “such goods or services or both shall be available, where it is obligatory”. This somewhere implies that the proviso added is in regard to both goods and services and not only the leave travel benefits which is purely service as provided in clause (iii).
There could be different arrangements and situations under which the employer provides the canteen facility to their employees which are listed below for better understanding.
Case 1: When the caterer raises invoice directly to the employee for Rs 100/- with GST and the employee gets the reimbursement of the same from the employer as per the employment terms.
This will fall under Schedule III i.e., will not be considered as supply and no GST will be charged.
In this case, the company will book the whole amount as expense in its books of account. There is no question of claiming the ITC as the invoice issued is not in the name of company.
Case 2: When the caterer is providing food @ Rs 100/- but the invoice is raised in two parts. 30% to the employee i.e., Rs 30/- with GST and 70% to the employer i.e., Rs 70/- with GST. The company pays Rs 70/- with GST to the caterer.
In this case, the services are provided by the caterer directly to the employees without the involvement of the employer. Also, the company is paying directly Rs 70/- plus taxes to the caterer.
Employer will not be required to pay GST since the same is as per the employment contract in the nature of perquisites.
As per the AAR in Musashi Auto Parts (P.) Ltd. and Tata Motors Ltd, as discussed above, ITC will not be allowed. Even if the same is allowed it will be restricted to only 70% which is paid by the company considering the canteen facility provided by the employer to employee is under an obligation of Factories Act, 1948.
Case 3: When the caterer is providing food @ Rs 100/- + GST and the invoice is issued in two parts, Rs 70/- plus GST to the company and Rs 30/- plus GST to the employee. Subsidized rate of Rs 30/- is deducted from the salary of the employee and payment of Rs 100/- plus taxes is done to the caterer by the company.
In this case, the employer will not be required to pay GST since the same is as per the employment contract in the nature of perquisites.
As per the AAR in Musashi Auto Parts (P.) Ltd. and Tata Motors Ltd, as discussed above, ITC will not be allowed and if allowed will be restricted only to the taxes paid on Rs 70/- by the company considering it obligatory under the Factories Act, 1948.
Case 4: When the caterer is providing food @ Rs 100/- + GST and the invoice of Rs 100/- plus tax is issued to the company. Subsidized rate of Rs 30/- is recovered by the company from the employees & payment of Rs 100/- plus taxes is done by the company to the caterer directly.
In this case the company will be required to pay tax on Rs 30/- which is recovered from the employees. Since there is an employer-employee relationship, Rs 30/- cannot be considered as the “Transaction value” and accordingly valuation rules will apply in order to arrive at the value.
As per Rule 28, Open Market value will be considered as the value on which GST will be levied, in this case this will be Rs 100/-. Thus, the company will pay GST on Rs 100/- @ 5% as per Notification No 20/2019-Central Tax (Rate) dated 30th September, 2019.
Entry no (ii) of the notification states that supply of “restaurant services” other than at “specified premises” will be liable to pay tax @ 5% provided that credit of input tax charged on goods and services used in supplying the services has not been taken.
In the same notification, “Restaurant service‟ is defined as:
“Restaurant service” means supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied.
In this case as per the above notification Input Tax Credit will not be allowed on the canteen services provided by the employer to the employee, where the employer is discharging tax @5% on outward supplies despite the same is under a legal obligation.
In order to conclude the above analysis, it can be said that all the services which are provided either by the employer to employee or vice-versa, under the employment contract as perquisites are outside the ambit of GST. If the services are provided by the employer to the employees and the same does not become part of the employment agreement, liability to pay GST arises since the same is not excluded and will be considered as supply. It is a heavy cost for the companies since the government does not seem to be in the favour of providing ITC on the canteen services as can be seen from the decisions in the AAR.
