As we all know, leviability of GST and Eligibility of ITC pertaining to Staff Canteen Services Provided by the Businesses to its Employees is a very complex and contentious issue. In this regard, we have attempted to analyse all related provisions including circulars related to Staff Canteen and advance rulings so that informed decision can be taken by the Taxpayers.
Brief about the Issue
Generally, Taxpayers provide Staff Canteen Services to their employee either due to statutory provisions like Factories Act or due to their internal policies. In some of the cases, Staff Canteen Service is provided Free of Cost and in some of cases, some nominal amount is recovered from Employee and rest amount is borne by the Taxpayer itself.
Question to Answer:
1. Whether GST is chargeable on Staff Canteen Service Provided by the Taxpayer to its employees.
2. Whether ITC is available on inputs & input service availed for providing such service to its employees.
Area Covered in Article
1. Various Legal Provisions including Relevant Circular
2. Discussion about Taxability
3. Discussion about ITC Eligibility
4. Brief of Advance Rulings
5. Conclusion including Advice
1. Various Legal Provisions involved
Supply: Section7: (1) For the purposes of this Act, the expression ―supply includes––
(a) all forms of supply of goods or 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;.........
Business: Section 2(17): business includes ––
(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;........
Outward Supply: Section 2(83): ―outward supply in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business;
Circular 172/04/2022: Perquisites provided by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST when the same are provided in terms of the contract between the employer and employee.
Clause 6(b) of Schedule II (It will be considered as Supply of Service): supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.
Section 46 of Factories Act: It provides for mandatory provision of canteen facility in factory where number of workers is more than 250.
Discussion about Taxability
In favour of Taxpayers:
1. After Circular, if canteen service is provided as per terms of contractual agreement entered into between Taxpayers and its Employees, it will not be subject to GST.
2. If no contractual agreement, then in that case, it can be argued that:
a. Since there is no profit motive involved in provision of canteen service and it is not the main business of Taxpayer, this activity of provision of canteen service does not fall within the ambit of course of business. Accordingly, does not quality to be Supply as per Section7.
b. It has been provided part of HR policy even if it is not specifically provided in contractual agreement.
c. As per Schedule-III, service by Employee to Employers is outside the ambit of GST.
d. By collecting amount from Employees and giving it to Vendor of Food, Taxpayer is just working as a facilitator between Canteen Service Provider (vendor) and its employees. It is not providing any canteen service to Employees.
In favour of Department (if no contractual Agreement):
1. Department may argues that Section 2(17)(b) includes incidental activities in the definition of Business, accordingly, provision of staff canteen is covered in the definition of Business and in turn is a Taxable Supply. Further, even Circular has not given exemption from Staff Canteen/perquisites on this account.
2. Definition of Outward Supply read with clause 6(b) of Schedule-II, covers the provision of Staff Canteen as Supply of Service.
3. Valuation of Such Service will be carried out as 110% of Cost of Provision of Service as Employees are covered in the definition of Related Persons; accordingly, value is required to be ascertained in terms of Rule 28 read with Rule 30.
Discussion about ITC
If Staff Canteen Service is provided due to statutory obligation i.e. Factories Act, then ITC will be available in terms of proviso to Section 17(5) which says that:
.....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....
Brief of Advance Rulings:
Most of the Advance Rulings held that provision of Staff Canteen is not chargeable to GST as it does not falls into ambit of Business. Further, it has also been held that it is not taxable being covered in Schedule-III (Employer-Employee).
However, some of Advance Rulings are in favour of Department considering it is Taxable Supply in terms of Section 2(83),Clause 6(b) of Schedule-II and Section 2(17)(b) as discussed above.
Conclusion including Advice:
Considering above discussions, it can be held safely that where Staff Canteen Service is provided as per contractual agreement between Employee and Employer, it will not be chargeable to GST. However, where Taxpayers fails to prove it, it may result into legal dispute even if arguments are there in favour of Taxpayer.
Therefore, it is suggested that specific term for provision of staff Canteen Service by the Taxpayers to its Employees should be incorporated in Employment Agreement to save themselves from such legal tussles.
Taxability of other perquisites like Transport Service etc: Above discussion will squarely applicable to other perquisites also.
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Disclaimer: We have taken due care while explaining the provisions surrounding the issue, however, Fab Gyan and its Team will not be responsible for any mistake