ITC on Canteen Services Provided to Employees: GST AAR Order

Are you confused whether you should avail ITC on canteen service provided to the employees or not? The tax authority should not penalize you for such a mistake. To avoid this confusion, one of the taxpayers has asked the same from the Authority for Advance Rulings. 

In view of the application from  M/s. Dormer Tools India P Ltd, the Gujarat Authority for Advance Ruling (GAAR) issued a ruling, addressing the GST implications on canteen services provided by M/s. Dormer Tools India P Ltd. to its employees. This article will discuss the AAR ruling in simplest form so that it can be comprehended.

Details of the Case

Questions Raised

1. Whether the deduction from employees’ salaries for canteen services constitutes a ‘supply’ under GST laws.
2. Whether GST is applicable on the nominal amount deducted from employees’ salaries.
3. Eligibility for Input Tax Credit (ITC) on GST paid to the CSP (Canteen Service Provider).

Key Points from the Ruling

Canteen Service Arrangement:

• The applicant provides canteen services as mandated under Section 46 of the Factories Act, 1948.
• Employees are charged Rs. 338 per month for the food supplied by a canteen service provider (CSP).
• The GST on the entire canteen bill is borne by the applicant, not the employees.

Analysis and Findings

Supply of Services and GST Applicability

Section 7 of the CGST Act, 2017:

• Defines ‘supply’ as all forms of supply of goods or services for a consideration in the course of business.
• Clarifies that services provided by an employer to an employee as part of a contractual agreement are not subject to GST.

GAAR Ruling:

• The deduction of a nominal amount from employees’ salaries for canteen services does not constitute a ‘supply’ of services. This means the company cannot charge from the employees separately else ITC will not be allowed.
• Since the canteen service is part of the employment contract, it is outside the scope of GST.

Input Tax Credit (ITC) Eligibility

Section 17(5) of the CGST Act, 2017 (Post Amendment):

• ITC is available on goods or services if it is obligatory for an employer to provide the same under any law.
• Circular No. 172/04/2022-GST further clarifies that ITC on food and beverages is allowed if it is obligatory under the Factories Act, 1948.

GAAR Ruling:

• ITC on GST charged by the CSP is available to the applicant, restricted to the extent of the cost borne by the applicant.
• ITC is not available for the portion recovered from employees.

Key References and Notifications

• Circular No. 172/04/2022-GST dated 06.07.2022 (download here)
• Section 7 and Section 17(5) of the CGST Act, 2017
• Section 46 of the Factories Act, 1948

Frequently Asked Questions (FAQs)

Q1: Is GST applicable on the nominal amount deducted from employees’ salaries for canteen services?

• A1: No, GST is not applicable on the nominal amount deducted as it does not constitute a ‘supply’ under GST laws.

Q2: Can the employer claim ITC on GST paid to the CSP?

• A2: Yes, the employer can claim ITC on GST paid to the CSP, but only to the extent of the cost borne by the employer.

Q3: What laws mandate the provision of canteen services to employees?

• A3: Section 46 of the Factories Act, 1948 mandates the provision of canteen services to employees.

Conclusion

The GAAR ruling clarifies that the nominal amount deducted from employees’ salaries for canteen services does not constitute a ‘supply’ under GST laws and is therefore not subject to GST. 

Additionally, the employer is eligible to claim ITC on GST paid to the CSP, limited to the cost borne by the employer. This ruling provides significant relief to employers by clarifying the tax treatment of employee canteen services.