Canteen in Factories- GST ITC and GST Liability

Preamble: Companies/ Factories  provide canteen facility to its employees as per Factories Act, 1948. Section 46 stipulates that any factory employing more than specified number of workers is required to provide canteen facility to its employees. Since this is mandatory, ITC of canteen services provided to employees should be available in view of proviso to section 17(5)(b) of CGST Act. This clause is inserted vide CGST (Amendments) Act, 2018 w.e.f. 01-02-2019. For the purpose of ITC, section 17(5)(b) of CGST (Amendments) Act, 2018, company is eligible for taking ITC on inputs used for providing such canteen services.

Canteen: Restaurant Service” defined under clause (xxxiii) of the explanation to the notification 20/2019 dated 30th Sept 2019.The definition of restaurant service includes within its ambit eating joint including mess, canteen, where food or any article for human consumption is supplied. Canteen Facility will be covered under the ambit of ‘restaurant service’ and not by “Outdoor Catering” since the explanation has specific inclusion of the same. Further, the fact that ‘Canteen Facilities are not event-based or occasional in nature, as it is provided on regular in nature and in some organization is mandatory in nature.

Input Tax Credit: ITC admissibility for the ‘Canteen Facility is the most concerned issue for the industry. Section 17(5)(b) of the CGST Act, 2017 deals with blockage of the ITC on food and beverage whether supplied as goods or services or both.Further, a provision to this clause was inserted w.e.f. 01.02.2019, wherein input tax credit in respect of foods & beverage shall be available, where it is obligatory on part of the employer to provide to its employees under any law for the time being in force. For instance, under the Factories Act, units crossing a certain number of workers need to mandatory provide ‘Canteen Facility to its employees. So in this case ITC shall be admissible.

A further explanation has been entered which clarifies that rates prescribed in the above entries which are also subject to conditions specified therein (i.e. No Input Tax Credit) are mandatory in nature and not optional and there is no option to charge a higher rate of tax and avail ITC. Notification being a rate notification and not an exemption notification does not appear to be optional to the dealer.

GST Charging to employees/ workers:  

Maharashtra advance authority ruling held in case of Tata Motors Limited [2020] that a nominal amount from its employees for providing transportation facilities ( the same may applies to canteen facility ] cannot be said to be a service provided by the employer to employee, in fact, applicant i.e. the employer is the receiver of service and employees are a user of such services. AAR held that by virtue of Entry No. 1 of Schedule-III to the CGST Act 2017 that GST is not applicable to the nominal amount recovered by applicants from their employees.

This was further substantiated by the decision of Hon’ble High Court of Andhra Pradesh in Erstwhile Service Tax Law in matters of Bhimas Hotels (P.) Ltd. v. Union of India where if food is provided at a subsidized rate, then it is part of wages and no Service tax shall be charged.

However,  Section 7(1) (c) of CGST Act 2017 read with Entry 2 of Schedule I which says that the transactions specified in Schedule-I shall be treated as supply even if provided without consideration and the said entry 2 covers supply of goods or services between related persons. As per entry (iii) of explanation (a) to Section 15 related person includes an employer-employee relationship.

Conclusion:

Employers can avail GST ITC on canteen food, beverages  services.

Canteen restaurant service will fall mandatorily under 5% GST rate.

Employers charging subsidized rate to employees will be subject to GST applicability or reversal of ITC to the extent.