The canteens are “CLOSED” as of now and the lunch box carried from home are the primary source of food for people who re-joined the office, still the queries related to the canteen remains “OPEN”. The persistence of complexity as to the GST treatment of subject transaction has prompted an attempt to add some clarity.
The facility of canteen is essential for many factories/ plants and that may be due to prevailing law or due to requirements of such industry or terms of employment. It also promotes productivity and health. Such facilities are extended to employees on Free of Cost/ Concessional or on fully chargeable basis.
If some recovery is done for such facilities (fully/ partly) – then the concept of “Canteen recovery” comes into play. Under GST- this part is a “paraplegia” i.e. both the legs are paralyzed. Meaning thereby - there is complexity as to taxability of such recovery and also for availability of corresponding ITC. This article aims to resolve such complexity on both these aspects:
Discussion on “Supply” i.e. Whether Canteen recovery is a “supply” under GST
In terms of section 7 (1) (a) of the CGST Act, supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made for a consideration by a person in course of furtherance of business.
Further, In terms of section 7 (1) (d), there are certain activities and listed in Schedule III to the CGST Act, which are deemed to be treated as neither supply of services nor of goods. The activity relevant here is "services by an employee to the employer in the course of or in relation to his employment". It means the services rendered by an employee to his employer in the course of his employment does not constitute supply per se, and hence out from purview of GST.
Though, only services by employee to employer has been covered in the above exclusion (and not vice-versa), the supply by the employer to the employee in terms of contractual agreement is not a supply and therefore not subject to GST. This was confirmed by the CBIC press release dated 10 July, 2017. These supplies may be FOC services provided to all or perquisites which are part of CTC.
Recently, in the matter of Bhimas Hotels Pvt. Ltd. vs Union of India[1] the hon'ble A.P. High Court in a related matter under the Service Tax had observed the following:
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- any supply of subsidized food to the workers by the management of a Company, has to be seen as part of the pay package that the workers have negotiated with the employer.
- The Court relied upon the definition of the wages given in Industrial Dispute Act, 1947 under Section 2 (rr) (ii) which inter alia includes “the value of any service or of any concessional supply of food-grains or other articles”, to hold that food supplied by the employer to its employee at subsidized rate forms part of the wages.
- Once the activity in the form of supply of food to its workers at a subsidized rate is understood to be part of their industrial obligation, it is inconceivable that the same can be construed as any taxable service.
In light of the above, it may be construed that if an establishment is providing canteen facility at subsidized rate of employee in terms of the overall pay package agreed with the employees. The press release very categorically clarifies that provision of perquisites by the employer in terms of the employment agreement are not liable to GST in terms of S. No. 1 of Schedule III.
That, The AAAR – West Bengal in re-Caltech Polymers Pvt. Ltd.[2], has not appreciated the ruling of AP High Court on the ground that decision was based on dual taxability of food under service tax and VAT and since there is no such issue of dual taxability under GST, then the ruling is not applicable. However, in view of the Author, the AAAR has not appreciated the material aspects of the judgment viz. food being supplied forming part of the wages, therefore may not be considered as an independent service.
Based on above, the author is of the considered view that the canteen service provided by the employer to the employee is a condition to the employment covered by Schedule III of the Act and therefore, it may not amount to providing outward taxable supply. There may not be any GST liability on the same. Any attempt by the revenue to tax it has to be appropriately defended. One could evaluate the possibility of having appropriate reference of canteen in its employment letter or HR policy. This could also require understanding taxation under Income Tax as perquisite in the hands of employees.
Discussion on Input Tax Credit
ITC on food, beverages and outdoor catering has been specifically blocked under section 17(5). However, as per provision to Section 17 (5)(b) - where it is obligatory for an employer to provide the goods or services to employees under any law for the time being in force, then ITC of such goods or services shall be available. Therefore, if such requirement exists under the Factories Act or any other local law, then ITC may be availed for inward supplies relating to canteen services.
What if such requirement does not exist – In such case if the inward supply is of “canteen service” a view could be taken that Sec 17(5) ibid. restricts ITC in respect of food and catering only, and not for canteen services.
As far as the question of canteen service being considered to be for “personal consumption” of employees, it is submitted that the definition of business under GST includes any activity or transaction in connection with or incidental or ancillary to any trade, commerce, manufacture or profession etc. Thus, welfare activities or facilities to employees including canteen is not meant for personal consumption of the employee. Only when the personal obligation of an employee is met by the employer- it is considered as personal consumption.
Conclusion
In light of the above the authors are of the view that, provision of canteen facility to employees, as a part of their pay package, is not a "supply" per se and accordingly no GST needs to be charged on such perquisites. As far as availability of ITC is concerned, if requirement for canteen exists under Factories Act etc., then ITC of GST charged on goods and services so received could be availed in terms of proviso to Section 17 (5) (b) ibid.
Special thanks to CA Ashish Chaudhary sir, for his valuable inputs.
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