Summary:

The issue before the Kerala Authority for Advance Ruling (‘the KAAR’) was whether Goods and Services Tax (‘GST’) is leviable on the amount recovered for providing food in the canteen at subsidised rates from the employees and whether Input Tax Credit (‘ITC’) can be claimed on such supply. The KAAR held that GST is not leviable on such amount recovered from the employees and the Applicant is eligible to claim full ITC on all inward supplies used in the canteen

Facts:

• The Applicant, is a manufacturer and as per the requirements under Section 46 of the Factories Act, 1948, operated an in-house canteen to provide food to its employees (including the contract employees) by issuing food coupons at subsidized rates
• The Company paid GST at 5% on the value of food supplied to the employees. The taxable value is computed by adding a 10% markup to the cost incurred for running the canteen, in proportion to the number of contract employees out of the total employees

Issues before the ARR:

• Whether GST is leviable on the amount recovered at subsidized rates from employees (including contract employees), for providing food in the canteen run by the Applicant as mandated under the Factories Act, 1948?
• Whether ITC can be claimed by the Applicant in respect of inward supplies used in the canteen for supplying food to the employees?

Discussion and Ruling:

The KAAR held that the GST is not leviable on the amount recovered at subsidized rates from employees and the Applicant is also eligible to claim ITC basis the following:

• Section 46 of the Factories Act, 1948 mandated that factories employing more than 250 workers must provide a canteen. The Act defines “workers” to include contract employees, making the provision of food an implied condition of employment. Further, it was clarified that statutory requirements, such as those under the Factories Act, would be implied terms of the employment relationship, even in the absence of express contractual provisions
• The CBIC press release dated 10 July 2017 and CBIC Circular 172/04/2022-GST clarified that services provided by employers to employees under contractual agreements are not “supply” under Section 7 of the CGST Act, and hence not subject to GST
• Once canteen facilities are extended as part of legal obligations applicable to all “workers” (whether regular or contractual), the perquisite assumes the character of employment related welfare and cannot be taxed, even if a partial cost recovery is made
• The Proviso to Section 17(5)(b)(i) of the CGST Act, 2017 allowed ITC where the provision of food or beverages is a statutory obligation, and does not make ITC eligibility conditional upon the manner in which consideration, if any, is received from employees

This ruling emphasized that GST should not be levied on the subsidized amount collected from employees for food, and that ITC is admissible since providing canteen services is a statutory obligation. Interestingly, the KAAR, in its ruling in the case of Caltech Polymers Pvt. Ltd., had earlier held that the supply of food items to employees, for consideration, through a company-run canteen would qualify as a ‘supply’ and be taxable under GST.