In the bustling landscape of Indian factories and corporate setup, providing canteen facilities and other perquisites to employees, deputed persons from sister concerns and third-party contractors have become a common phenomena. The Factories Act, 1948, statutorily mandates employers to provide certain amenities, including canteen services, for factories with more than 250 workers, but for others, it is voluntary and provided as a goodwill gesture. To maintain a conducive work environment, such facilities have become important. However, the advent of the Goods and Services Tax (GST) has introduced complexities, especially concerning taxation on canteen facilities provided to employees, deputed persons and third-party contractors.
Even though the GST legislations provide that services rendered by an employee to the employer in the course of or in relation to his employment is neither supply of goods nor services, it is unclear when certain benefits/ services are provided by the employer to the employees. It is pertinent to note that under the GST legislation, employer and employee are regarded as related persons and hence the supply of goods or services between them, even in the absence of a consideration, may become taxable due to the deeming provision. Hence, during the initial years of GST implementation, taxability of any facility or perquisites by employers to their respective employees was extensively debated. Some argued that canteen facility is not in the course or furtherance of business and hence, not subject to GST because the employer is not engaged in providing canteen services as their core business activity. This amenity is provided by certain employers as a welfare measure for their employees, and any amount recovered for such services, if any, is to recover the cost or for the efficient administration of such facility. In fact, most employers end up spending more than what they could recover and claim such expenses to be towards welfare of their staff. Consequently, since this activity has not been undertaken in furtherance of business, it should be treated as outside the scope of supply.
On the other hand, opposing views vigorously assert that canteen recoveries can be considered ‘outward supply’ and taxable under GST regulations. This has led to divergent views among the Authority of Advance Ruling (AAR) and the Appellate Authority of Advance Ruling (AAAR) in different states.
Clarity Amid Confusion
The taxation of canteen recovery from employees under GST is a vexing issue, marked by contradictory rulings and uncertainties. The CBIC Circular No. 172/04/2022-GST, issued on July 06, 2022 (“Circular”), tried to bring some clarity on this intricate matter. This Circular affirms that perquisites provided in accordance with contractual agreements between employers and employees are not subject to GST. The Circular is in line with pre-GST era jurisprudence, wherein the judiciary had generally ruled that any provision of subsidised food by a company’s management should be regarded as part of the overall remuneration negotiated between workers and employers, emphasising the integral nature of such amenities in the employee compensation package.[1]
While the Circular provides a welcome resolution, it necessitates companies to revisit their employment contracts and HR policies to ensure adequate clarity regarding canteen facilities. The Circular doesn’t, however, address the issue of partial recovery for perquisites or facilities provided to deputed persons or third-party contractors working for the benefit of an organisation, leaving enough room for contrary interpretation and potential disputes.
Recent ruling
In the recent In Re: M/S. Suzuki Motor Gujarat Pvt Ltd., 2024 (2) TMI 848 – AAR, Gujarat, the AAR ruled that the portion of the amount recovered by Suzuki Motor Gujarat Pvt Ltd. from its permanent employees towards canteen facilities is not liable to GST. Supply of food to permanent employees, though involving recovery, is not deemed a taxable supply under GST legislations. However, the AAR also held that GST may be applicable on recoveries from deputed employees and non-permanent workers. The ruling asserts that recovery from non-permanent employees falls under the definition of ‘outward supply’.
The ruling delineates the eligibility of Input Tax Credit (ITC) for the GST charged by the canteen service provider for canteen facilities provided to permanent employees. However, this eligibility is restricted to the extent of the cost borne by the employer for providing canteen services to its permanent employees while leaving the supply of food to non-permanent employees under cloud.
Interestingly, the ruling also clarifies that the applicant is not eligible to avail ITC in respect of GST charged by the canteen service provider.
Concluding remarks
Even though the canteen facility conundrum sees some resolution with the Circular and certain favourable AARs, lingering issues persist. The AARs not only provide specific rulings on the taxability of canteen services, but also emphasise the need for companies to carefully evaluate their individual GST positions.
This also puts in question the taxability of benefits provided to seconded employees. The industry is already struggling with taxability of remuneration, benefits and perquisites provided to expatriate employees, this issue imposes an additional burden on them.
The eligibility of ITC, especially in cases of partial recovery from employees, remains a critical issue that demands further clarity. It is imperative that the CBIC and the GST Council take note of this complex matter and provide clarity to prevent prolonged litigations and unwarranted costs for industries.
As businesses navigate through the complexities of GST on facilities offered in their premises, staying abreast of developments in this complex landscape, rulings and continuously reassessing tax positions becomes imperative. While verbal contracts hold legal enforceability, substantiating them before tax authorities is challenging. Therefore, to avoid complications, it is advisable for taxpayers to comprehensively outline all perquisites and facilities in documents such as HR policies to avoid unwarranted GST implications. As the industry navigates through these complexities, addressing pending issues surrounding partial recovery and ITC eligibility is crucial for fostering a clear and compliant tax environment.
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
sr.patnaik@cyrilshroff.com
[1] Bhimas Hotel Pvt Ltd. v. Union of India, 2017 (4) TMI 860 – ANDHRA PRADESH HIGH COURT
