Employees are undoubtedly vital resources to carry out the affairs of the Company, thus it becomes important for any employer to provide basic facilities and good working conditions to its employees. Facilities such as transportation, healthcare, insurance, canteen services, etc. are often provided by employers to their employees as welfare measure.
A canteen facility is provided to employees at a nominal value or without consideration by employers. For provisioning of these canteen services, the employer usually hires a a third[1]party vendor who provides food directly to the employees against a consideration paid by the employer. In certain cases, after payment of consideration to third-party vendor, the employer also collects a nominal amount from its employees, and some part of the cost is borne by the employer himself.
Taxability of such recoveries against canteen services by the employees has been akin to controversies under the erstwhile regime and thus, it was expected that the government would keep the taxability of these recoveries clear in the Goods and Services Tax (GST) regime. However, due to a lack of explicit clarification to date, the employers have been left wondering with the only option is to seek directions from the Authority of Advance Ruling (AAR) which has been giving divergent rulings.
Under the GST laws, an activity to attract a levy of GST must qualify as "supply". The term supply as per Section 7 of the Central Goods and Service Tax Act, 2017 (the CGST Act) includes all forms of supply of services and goods such as sale, transfer, barter, exchange,etc. made or agreed to be made for a consideration by a person in the course or furtherance of business.
Also, it includes any supplies made between the related parties (employer and employee) even if made without consideration, and excludes services by an employee to the employer in the course of employment. Based on the above, it may be construed that the supplies made by the employer to its employee are exigible to GST in certain situations. However, this issue was addressed by the government wherein it was clarified that supply by an employer to its employee in terms of a contractual agreement between them will not be subject to GST.
In spite of such clarification companies providing canteen services to their employees have time and again faced interpretational issues revolving around the definition of supply and the clarification provided by the press release.
In the case of M/s Rites Ltd.1 where the applicant employer was engaged in consultancy service related to infrastructure and transport, the AAR has held that the recoveries made by the applicant from its employees for the canteen facility run by third-party vendor are outside the purview of scope of supply as there was no independent contract between the employees and the employer for the supply of canteen services and the same were supplied on account of the legal obligation under the Factory Act. Moreover, it wasn't in the course or furtherance of the business of the applicant since the principal supply of the applicant was not canteen service. Similarly, in the case of M/s Amneal Pharmaceuticals Pvt. Ltd.2, the Appellate AAR held that GST is not leviable on recoveries against canteen services as the applicant neither supplied any goods or services to its employees against the recoveries nor charged any margin on the recoveries. The applicant merely acted as a mediator between the employees and the third-party vendor. Further, in the case of M/s Emcure Pharmaceuticals Ltd.3 it has been held that GST is not leviable on the recoveries for arranging canteen facilities, since it is a welfare measure, mandated by the Factory Act and is not at all connected to the functioning of their main business.
However, there are advance rulings where the recoveries made towards canteen services has been included within the definition of supply. In the case of M/s Tube Investment of India Ltd.4 and Kothari Sugars and Chemicals Ltd.5, the AAR interpreted establishment of a canteen facility in the factory to be an incidental activity to the running of the main business and thus, is in furtherance of business. It has been held that supply of food to the employees is not contractually agreed and thus, is not an allowance under the employment. Accordingly, provision of canteen services, though for nominal value, is taxable under GST. The Appellate AAR in the case of M/s Caltech Polymers Pvt. Ltd.6 has held that supply of food, with or without profits, by the applicant to its employees is incidental or ancillary to the main business of manufacture and sale of footwear. The recoveries qualify as a consideration towards provisioning of canteen facility and thus, attract levy of GST.
Keeping in view that the tax is already being discharged by the third-party vendor on canteen services, levying GST on recoveries made from the employees will add unreasonable burden on the employer. Thus, to put an end to the confusion and to avoid the multiplicity of litigation, it is important that clarification in this regard is issued by the Government. While the industry awaits clarification, it is important to note that though the advance rulings are applicant specific, they do have an impact on the other taxable persons. Thus, it is imperative for an employer who is providing food in the canteen to its employees to check the nuances of the above AARs on its tax position with respect to canteen services.
Footnotes
1 M/s Rites Ltd., AR No. HR/ARL/19/2022-23, Order dated October 18, 2022 (AAR, Haryana).
2 M/s Amneal Pharmaceuticals Pvt. Ltd., AR (Appeal) No. GUJ/GAAAR/APPEAL/2021/07, Order dated March 8, 2021 (Appellate AAR, Gujarat).
3 M/s Emcure Pharmaceuticals Ltd., AR No. GST-ARA[1]119/2019-20/B-03, Order dated January 4, 2022 (AAR, Maharashtra). M/s Emcure Pharmaceuticals Ltd., AR No. GUJ/GAAR/R/2022/22, Order dated April 12, 2022 (AAR, Gujarat).
4 M/s Tube Investment of India Ltd., AR No: 12/2022- 23, Order dated November 24, 2022 (AAR, Uttrakhand).
5 Kothari Sugars and Chemicals Ltd., Order No. 20/AAR/2022, Order dated May 31, 2022 (AAR, Tamil Nadu).
6 M/s Caltech Polymers Pvt. Ltd., Order No. CT/7726/2018-C3, Order dated September 25, 2018 (Appellate AAR, Kerala).
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