Dubiety around taxability of canteen recovery under GST continues

The taxability of canteen recovery from employees has been topsy-turvy ever since introduction of Goods and Services Tax (GST). Latest CBIC Circular, No. 172/04/2022-GST dated 6th July 2022, provides much awaited clarity on the GST liability on the perquisites provided by the employer to its employees in terms of contractual agreement, one amongst many perquisites being the canteen service. In the backdrop of this circular and contradictory rulings on the matter, the issue deserves to be discussed afresh. Canteen facility is being provided by employers to employees which in certain cases is mandatory by the Factories Act 1948 and voluntary in others. Working lunch or canteen services are provided to employees / workers, generally following either of the arrangements:

1. Working lunch or canteen services are entirely sponsored by the employer through a vendor;
2. Employer recovers some portion of the cost from employees and pays entire cost to the vendor; and
3. On behalf of the vendor, employer only facilitate the collection of the cost from employees and pays to vendor in totality

In recent case, Gujarat Authority for Advance Ruling (AAR)[1] have pronounced that GST is not leviable on the canteen recoveries done from the employees. The same view is reiterated by the Gujarat and Madhya Pradesh Appellate Authority for Advance Ruling (AAAR)[2]. However, there are also contrasting rulings[3] being pronounced on the matter. With such pronouncement in different states, the debate over taxability of the canteen recovery under GST has become talk of the town. Considering the debate, an attempt has been made in this article to analyse the issue.

Key provisions:

The whole premise of taxability of the canteen recovery done from employees relies on the following key provisions under GST:

• Business: It includes any trade, commerce, manufacture, profession, or any other similar activity whether or not it is for a pecuniary benefit and any activity or transaction in connection with or incidental or ancillary to it.
• Consideration: It includes any payment made whether in money or otherwise in respect of the supply of goods or services whether by the recipient or by any other person including the Downloaded by Sameer.Shah@WalkerChandiok.IN at 11/07/22 01:58pm taxsutra All rights reserved monetary value of any act or forbearance.
• Supply: It includes all forms of supply of goods or services such as sale, transfer made for a consideration by a person in the course or furtherance of business.
• Ineligible Input Tax Credit (ITC): ITC is not eligible with respect to goods used for personal consumption. Further, ITC with respect to food and beverages, outdoor catering is not eligible. However, ITC in respect of such goods is available where an inward supply of goods is used for making an outward taxable supply of the same category of goods. ITC is also available with respect to such goods or services where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

Amongst others, whether the act of providing / facilitating the canteen facility is in the course or furtherance of business or not and thereby supply under GST is the moot question here. Not only the taxability but also the eligibility of the ITC of the GST paid on the canteen related expense is also questioned time and again. The eligibility of ITC has been an altercation. First, can the ITC be eligible under the shelter of the proviso that its obligatory for employer to provide the canteen facility under Factories regulations. Secondly, even if eligible, is it restricted on the grounds of personal consumption.

Taxability of canteen recovery

Gujarat AAR[4] pronounced that the recovery of amount from employee towards canteen facility is not taxable under GST. Also, the AAARs have overturned the rulings given by the AAR in Gujarat[5] and Madhya Pradesh[6] wherein it has been held that GST is not payable by the employer on recovery of amount for availing the facility of canteen. The following are key points discussed:

• As per Section 2 (17) of the CGST Act, 2017, business also includes any activity which is in connection with or incidental or ancillary to the main activity. However, supplying food through canteen facility cannot be construed as incidental or ancillary to the main business;
• It is not the employer who is supplying the foodstuff or canteen service to its employees, but it is a third party who is supplying. Employer is merely a facilitator between the canteen service provider and the employee, as in many cases the employer is mandatorily required to provide canteen facility under the Factories Act, 1948 (Factories regulations). Accordingly, the facility is being provided to comply with the Factories regulations; and
• In case, wherein the canteen service is provided free of cost to the employees, the same is likely to be covered as facility in the course of or in relation to employment and hence, not a supply under GST.

Basis above, rulings have primarily pronounced that providing canteen facility is not in the course or furtherance of business and hence, GST is not leviable on the canteen recoveries. Therefore, it may be inferred that, above position, if taken, should be supported by the robust documentation to substantiate position. Also, it may be observed that the arguments are germane wherein employers are mandated under the Factories regulations and facilitating the canteen facility.

Contrastingly, it is being argued that the amount recovered from employee with respect to canteen facility provided is a transaction incidental or ancillary to the main business of the applicant and therefore, the recovery done from the employees for canteen facilities may fall within the definition of ‘outward supply’ and hence, taxable under GST regulations. The same view is recently echoed by the Tamilnadu AAR[7]. The key arguments which have rendered the canteen recoveries as taxable under GST can be summarised as following:

• Provision of canteen facility can be held as incidental or ancillary to the main business. Accordingly, it can be said to be covered under the ambit of business as per clause (b) of Section 2(17) of the Central Goods and Services Act, 2017(CGST Act, 2017).
• The amount recovered from the employee can be considered as consideration as per Section 2(31) of the CGST Act, 2017; and
• Hence, the transaction of recovery of amount from employee may be covered under the definition of ‘outward supply’ as per Section 2(83) of the CGST Act, 2017 and therefore, taxable under GST regulations.

It may be observed that currently GST audit notices are widely served to the industry and this issue has Downloaded by Sameer.Shah@WalkerChandiok.IN at 11/07/22 01:58pm taxsutra All rights reserved been the bone of contention. Demands have been raised by the GST authorities and industry is keeping its own argument to disagree.

Eligibility of ITC

The eligibility of ITC on the canteen related expenses is caught between the clasp of contrary provisions under Section 17(5) of the CGST Act, 2017. On one side, ITC in respect of such goods or services 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. So, it may be inferred that, wherever its obligatory as per Factories regulations for the employer to provide canteen facility to employee, the ITC would be eligible. Whereas the provisions restrict the ITC on goods or services used for personal consumption- food and beverages.

Rulings have also denied the ITC on canteen related expenses. The skepticism over taxability is present in eligibility of ITC as well.

Conclusion

The above referred circular clarifies that perquisites provided by the employer to the employee in terms of contractual agreement will not be subjected to GST, when the same are provided in terms of the contract between the employer and employee. Given the dubiety due to contrary AARs / AAARs, this circular may put an end to the matter where canteen services are provided by the employers in terms of employment contract. However, the taxpayers should keep a close watch on developments on this matter and re-visit its tax positions. It would be prudent for lawmakers to come up with absolute clarity on the matter wherein the recovery is done from employees for the canteen services and resolve dubiety in order to avoid long drawn litigations and unwarranted cost for both- industry and judiciary.

[1] M/s. Emcure Pharmaceuticals Limited (GUJ/GAAR/R/2022/22) / [TS-197-AAR(GUJ)-2022-GST]
[2] M/s. Bharat Oman Refineries Limited (MP/AAAR/07/2021) / M/s Amneal Pharmaceuticals Pvt. Ltd (GUJ/GAAAR/APPEAL/2021/07)/ [TS-569-AAAR(GUJ)-2021-GST]
[3] M/s Caltech Polymers Pvt. Ltd (CT/531/18-C3)/ [TS-110-AAR-2018-NT]
[4] M/s. Emcure Pharmaceuticals Limited (GUJ/GAAR/R/2022/22)
[5] M/s Amneal Pharmaceuticals Pvt. Ltd (GUJ/GAAR/R/50/2020)
[6] M/s Bharat Oman Refineries Limited (MP/AAAR/07/2021)
[7] M/s Kothari Sugars and Chemicals Limited (TN/20/ARA/2022)

This article was originally published on TaxSutra.