Article on Input Tax credit for Canteen services provided by the company to its employees

Input Tax Credit for Canteen Services Provided by the Company to its Employees

Introduction

In India, the majority of companies offer canteen facilities to their employees on a voluntary basis or in compliance with Section 47 of the Factories Act 1948, which mandates that companies with over 250 employees must provide canteen facilities. For providing such service the companies usually entered into an agreement with the contractors to operate canteen within the premises of the company and provide food to their employees. For this purpose, the company recovers a nominal amount from their employees on a monthly basis and make a lumpsum payment to the canteen service provider against which the contractor (canteen service provider) issues a tax invoice in the name of the company and the company book such expenses in their books of accounts. From the GST point of view, two questions arise here, the first one is whether the company is eligible to claim input tax credit in respect of such canteen expenses and the second question is whether GST would be applicable on such nominal amount recovered from employees. Let us discuss both the issues one by one.

Applicable provisions

For the question of input tax credit, it is important to note that under GST laws to determine the eligibility of input tax credit for any expense incurred by the registered person, we have to check whether such expense is covered under sub-section 5 of section 17 of CGST Act 2017 or not. If any expense falls within the preview of section 17(5), then we can’t claim the input tax credit in respect of such expense even if the other conditions for claiming the input tax credit as specified in section 16 of CGST Act 2017 are fulfilled.

The clause (b) of sub-section 5 of section 17 of CGST Act 2017 is laid down as follows;
“(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:
(b) the following supply of goods or services or both-
(i) 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;

(ii) membership of a club, health and fitness centre; and

(iii) 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."

As per section 17(5)(b)(i) of CGST Act 2017, the ITC is specifically blocked in respect of food, beverages and outdoor catering. However, a proviso is given after section 17(5)(b)(iii) which states that where it is an obligation of the employer to provide the same to its employees under any law for the time being in force, then ITC in respect of such goods or services shall be available. Since such a proviso is given after clause (iii) of section 17(5)(b) not after clause (i) of section 17(5)(b), due to this, lot of confusion arises about whether such a proviso is also applicable to section 17(5)(b)(i) or not.

Under GST law, whenever any ambiguity arises in respect of any provisions of the Act, then in such cases, to ensure uniformity in the implementation of the provisions of law across the field formations, the CBIC issues various circulars on a timely basis. Accordingly, to resolve the ambiguity in this case also, Circular No. 172/04/2022 was issued by CBIC on 06.07.2022 which provides clarification on various issues pertaining to GST. In the serial number 3 of Para 2 of said circular it has been clarified that the proviso given after sub clause (iii) of clause (b) of sub section (5) of section 17 of the CGST Act applies to the whole of clause (b) of sub-section (5) of section 17 of the CGST Act. Accordingly, the input tax credit in respect of food, beverages and outdoor catering would be available to the registered person if such services are provided due to an obligation given under the Factories Act.

In respect of the same question, there are various judgements of advance ruling authorities & appellate authority for advance ruling which were pronounced before issuance of above circular 172/04/2022 like Musashi Auto Parts India Private Limited [2020(08)LCX0136(AAR) & [2020(09)LCX0225(AAAR)], Tata Motors Limited [2021(07)LCX0248(AAR)], Emcure Pharmaceuticals Limited [2022(04)LCX0125(AAR)] wherein it was held that said proviso would be applicable only to section 17(5)(b)(iii) not section 17(5)(b)(i), hence the ITC was disallowed by the authorities but after the issuance of circular by CBIC the appellate authority for advance ruling has reversed the decision of lower authority and held that ITC would be available for such expenses like in case of Tata Motors Limited [2022(12)LCX0134(AAAR)]. In addition to this, in the case of Tube Investment of India Limited [2022(11)LCX0048(AAR)] the authority held that ITC would not be available even when the same is obligatory in terms of Factories Act,1948. This judgement is pronounced even after the issuance of above circular but the impact of the said circular was not considered in it. To sum up, as it is clearly stated in the above circular said proviso would be applicable to the whole of clause (b) of sub-section (5) of section 17 of the CGST Act.Accordingly, if the companies which have more than 250 workers and due to an obligation under Factories Act, the company is providing canteen facilities after charging nominal amount from their workers and paying a lumpsum amount to the canteen service provider then in such case, the company can claim the input tax credit in respect of the tax invoice received from the canteen service provider, since there is an obligatory requirement to provide such services to employees. The important point to note here is that the ITC on GST charged by the Canteen Service Provider would be restricted to the extent of the amount recovered by the company from their employees.

The next issue to be decided is whether GST would be applicable on the deduction of the nominal amount made by the company from the employees who are availing of canteen facilities. For a transaction to be covered under the GST it is necessary to examine whether such transaction is covered under the scope of supply as defined in section 7 of the CGST Act, 2017. In terms of Section 7, supply means all forms of 'supply of goods/services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. As the consideration is being charged from employees, can we consider such transaction as supply by the employer to employees and charge GST for such services? The same was also clarified in serial number 5 of para 2 of Circular No. 172/04/2022 that the perquisites provided by the employer to its employees in terms of the contractual agreement entered into between the employer and the employee are in lieu of the services provided by employee to the employer in relation to his employment. It follows there from that perquisites provided by the employer to the employee in terms of contractual agreement entered into between them will not be subjected to GST when the same is provided in terms of the contract between the employer and employee.

The CBIC vide the Press Release dated 10.07.2017 with the description “GST on gifts”, clarified that the services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods nor supply of services). It follows that supply by the employer to the employee in terms of contractual agreement of employment (part of the salary/CTC) is not subject to GST. The above press release makes it clear that any benefit provided to the employees as part of employment contract would not be subjected to tax under GST.

There are various judgements of advance rulings and appellate authorities for advance rulings wherein it was held that GST is not applicable on the nominal amount charged for such services provided by employer to employees. The Madhya Pradesh Appellate Authority for Advance Ruling in case of M/s Bharat Oman Refineries Ltd. [2021(11)LCX0118(AAAR)] has reversed the ruling pronounced by the advance ruling authority (AAR) in such case the AAR has pronounced that facility of canteen services was liable to GST and valuation of canteen facility provided by the applicant to its employees shall be as per Rule 28 and not at the nominal amount recovered by the applicant from its employees. However, the Appellate Authority for Advance Ruling (AAAR) held that “The appellant collects employees' portion of amount and pays the consolidated total amount, which includes appellant's share of amount also, to the Canteen Service Provider towards the foodstuffs provided to employees by the Canteen Service Provider. The appellant neither keeps any margin in this activity of collecting employees' portion of amount nor makes any separate supply to the employees. Furthermore, it is not the appellant who is supplying the foodstuff or canteen service to its employees, but it is a third party who is supplying the foodstuff or canteen service to the employees of the appellant. In our view, as the appellant is not carrying out the said activity of collecting employees' portion of amount to be paid to the Canteen Service Provider, for any consideration, such transactions are without involving any 'supply' from the appellant to its employees and is therefore not leviable to Goods and Services Tax”.

Similarly, the Haryana Authority for Advance Ruling in M/s Rites Limited [2022(10)LCX0064(AAR)] held that no GST is payable on nominal recoveries made by the applicant from employees towards the provision of canteen facility. There are many other advance rulings where it was decided that GST is not applicable on the amount recovered from employee on account of third party canteen services. These are M/s. Amneal Pharmaceuticals Pvt. Ltd [2021(03)LCX0287(AAAR)], M/s Dishman Carbogen Ameis Ltd.[2021(07)LCX0250(AAR)], M/s Cadmach Machinery Pvt. Ltd. [2022(04)LCX0124(AAR)] etc. Accordingly, it is also clear that no GST would be applicable on the nominal amount recovered from employees for the canteen facility.

Conclusion

From the above detailed discussions, it can be concluded that where it is an obligation on the company to provide canteen facilities due to section 47 of the Factories Act 1948, then ITC would be available to the company. But if any amount is recovered by the company from their employees, in such situation the ITC availed by the company would be reduced by the amount recovered from employees and no GST would be applicable on the amount recovered by the company from their employees.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.