18 November 2021
With re-opening of offices post the second wave of COVID-19, various employers have re-initiated providing canteen, cab, health insurance and many other services to their employees as part of welfare programme as well as obligations under various labour law regulations. The employer may choose to recover the cost of providing such services in full or offer a concession or deduct it from the concerned employees’ salaries or supply them free of cost. Surprisingly, the Goods and Services Tax (“GST”) legislation neither provides for any exemption nor declares that services rendered by the employer to its employees would not be in the nature of goods or services.
However, the Central Board of Indirect Tax and Customs (“CBIC”) vide Press Release dated July 10, 2017 (“Press Release”) had issued clarification on taxation of perquisites. It clarified that supplies made by the employer to the employees based on their contractual agreements would not be subjected to GST. Moreover, a transaction involving such services, on which GST has been paid to a third party, would not attract further GST when the employer provides it free-of-cost to the employees.
Nevertheless, where an employer recovers either the full amount or a partial amount from the concerned employees, there is no clarity. The whole rumpus of exigibility to GST has arisen because employer and employees are regarded as related parties under GST legislation and supply between related parties, even in the absence of a consideration, is treated as a supply exigible to GST.
Analysis of Advance rulings under GST
Remarkably, both the Appellate Authority for Advance Ruling (“AAAR”) and the Authority for Advance Ruling (“AAR”) have held that where the employer does not provide any services but merely collects full amount or a lower amount from its employees to make payments to third party service providers, no GST would be payable. For instance, the following have been decided to be not exigible to GST in the hands of employer such as recovery of parent’s health insurance expense from the employees[1]; recovery of premium amount from employees[2], nominal amount for providing transportation facilities[3], amount collected for canteen services.[4]
Unfortunately, certain other AARs have been harsh in determining GST implications on services provided by an employer to its employees on the basis of perfunctory reasoning.
For instance, the Kerala AAAR in the matter of Caltech Polymers (P.) Ltd.[5] observed that while the applicant was engaged in the manufacture and sale of footwear, it also provided canteen services to its employees to comply with Section 46 of the Factories Act, 1948.[6] The canteen was operated by the applicant on no-profit basis within a space inside the factory premises where the food was cooked by a cook employed by the employer on a monthly remuneration basis. The vegetables and other items required for preparing the food items were also purchased by the applicant directly from the suppliers. The expenditure incurred on such items for preparation of food was recovered from the employees, as a deduction from their monthly salaries in proportion to the food consumed by them. The AAAR held that the provision of food items to the employees for a consideration in a canteen run by company would come under definition of ‘outward supply’ and hence, shall be taxable as supply of service under GST.
Surprisingly, the Haryana AAR in Musashi Auto Parts Pvt. Ltd.[7], even when the third-party canteen service provider was involved, held that supply of coupons (for purchasing food) by employer to employees at 25% of the cost of food were taxable. The AAR was of the view that Schedule III of the CGST Act, 2017 only provides that services of employees to the employer were excluded from the purview of GST and not vice-versa.
Similarly, the Tamil Nadu AAR in Mfar Hotels & Resorts Pvt. Ltd.[8] discussed the GST liability for food supplied via canteen to their employees on a free-of-cost basis as part of the employment contract. The AAR held that supply of free food to the employees was supply of service as per paragraph 2 to Schedule I of the CGST Act and was in the course or in furtherance of business as it was a part of the employment contract.
Closing Remarks
It is worth considering that while the Press Release specifically provided that services rendered under the employment contract would be outside the GST net, contrarian views have been adopted by various state AARs. Even under the erstwhile regime, while the activity was specifically exempted[9], the Andhra Pradesh High Court (“HC”)[10] was being approached to comment on whether supply of food to the workers at a subsidised rate was to be regarded as a service for the levy of service tax. The HC was of the view that the supply of subsidised food is considered part of wages by relying on certain provisions of the Factories Act, 1948 and the Industrial Disputes Act, 1947. Thus, being a statutory obligation, it was held that such activities cannot be construed as services for the purposes of service tax. If similar thought is applied to GST legislation, the position on levy of GST on supply of food to employees as a taxable supply sounds illogical.
In other words, where the authorities continue to treat supply of food items or other services to employees as a taxable supply, it would be a tainted interpretation. The activity must be considered holistically to determine whether it is undertaken in the course or in furtherance of ‘business’, which is one of the essential elements to qualify as supply. The Memorandum of Association or Article of Association of the concerned company must be reviewed and considered to determine the nature of business a company intends to undertake. Activities for employee welfare, promoting work culture or actions that are in compliance with applicable laws are not regarded as independent business activities. Instead, such activities are merely incidental to the employment or are facilitated to the employees and may not affect business. Thus, it may not be considered in the course or furtherance of business.
Thus, the quandary of levy of GST on employer’s services to employee needs to be clarified by a superior court or by the Central Board of Indirect Taxes and Customs.
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
srpatnaik@cyrilshroff.com
[1] In re: POSCO Indian Pune Processing Centre Private Limited – 2019-VIL-25-AAR (Maharashtra), In re: Jatun India Pvt. Ltd. 2019 (29) GSTL 778 (Maharashtra); In re: Tata Power Company Limited [TS-595-AAR(MAH)-2021-GST]
[2] In re: Ion Trading India Pvt. Ltd – 2020-VIL-27-AAR (UP)
[3] In re: Tata Motors Ltd., [2020] 119 taxmann.com 106 (AAR – Mah.)
[4] In re: Amneal Pharmaceuticals Pvt. Ltd [TS-569-AAAR(GUJ)-2021-GST]; In re: Dishman Carbogen Amcis Ltd. [TS-443-AAR(GUJ)-2021-GST]
[5] In re, Caltech Polymers (P.) Ltd., [2018] 98 taxmann.com 355 (AAAR-KERALA)
[6] Section 46 of the Factories Act, 1948 provides that any factory employing more than 250 workers is required to provide canteen facility to its employees
[7] In re: Musashi Auto Parts Pvt. Ltd. [TS(DB)-GST-AAR(HAR)-2020-939]
[8] In re: Mfar Hotels & Resorts Pvt. Ltd. [TS-896-AAR(TN)-2020-NT].
[9] Notification No. 25/2012 – ST dated June 20, 2012.
[10] Bhimas Hotels (P.) Ltd. v. Union of India [2017] 81 taxmann.com 183 (AP.)
