GST & ITC on recovery from employees against canteen/transportation facilities

In re Kirby Building Systems & Structures India Private Limited (GST AAR Telangana)

The recent ruling by the Authority for Advance Ruling (AAR) in Telangana sheds light on the Goods and Services Tax (GST) implications and Input Tax Credit (ITC) eligibility concerning recoveries made by employers for canteen and transportation facilities provided to employees. The case in question involves M/s. Kirby Building Systems & Structures India Private Limited, a company engaged in the manufacture and supply of pre-engineered buildings and storage racking systems.

Background:

1. Canteen Services: The applicant, Kirby Building Systems, argued that the canteen services provided to its employees, as mandated under Section 46 of the Factories Act, 1948, and contractual agreements, should be exempt from GST. The applicant asserted that the services are provided as a perquisite to employees and fall outside the purview of GST.

The Factories Act, 1948, specifies that factories with more than 250 workers are mandated to provide and maintain a canteen. The applicant contended that the canteen services, as provided to employees, should be considered a perquisite and, therefore, not subject to GST.

The AAR examined the statutory provisions of the Factories Act and referenced Circular No. 172/04/2022, which clarifies that prerequisites provided by employers to employees under contractual agreements are not subject to GST. The AAR agreed with the applicant, stating that canteen services provided as a perquisite are exempt from GST. However, it emphasized that if the canteen services are charged for business purposes, they would be subject to GST at prescribed rates.

2. Input Tax Credit on Canteen Services: The applicant sought clarification on the eligibility for Input Tax Credit (ITC) on canteen services. The AAR, referencing Section 17(5)(b) of the CGST/TGST Act’2017, stated that input tax credit on canteen facilities would be available if it is obligatory for an employer to provide the same under the Factories Act, 1948.

This provision clarifies that input tax credit is not available in respect of goods or services supplied for personal use or consumption. However, the proviso to this section allows for input tax credit if the provision of such goods or services is obligatory for an employer under any law for the time being in force. Therefore, the AAR held that input tax credit on canteen services would be available when it is mandatory for the employer to provide these facilities under the Factories Act, 1948.

3. Transportation Services: Kirby Building Systems also provided transportation facilities to its employees and recovered nominal amounts without any commercial objective. The applicant contended that such transportation services, provided as a perquisite, should be exempt from GST.

The AAR considered the Notification No. 12/2017, which exempts the intra-state supply of transport of passengers in non-air conditioned contract carriages from the payment of Central tax. However, it noted that the applicant was not under any statutory obligation to provide these services.

The AAR agreed that if transportation services are provided as a perquisite, they are exempt from GST. However, if charged for business purposes, they would be subject to GST at prescribed rates.

4. Input Tax Credit on Transportation Services: The applicant sought clarification on the eligibility for Input Tax Credit (ITC) on transportation services provided to employees. The AAR, citing Section 17(5)(g) of the CGST/TGST Act’2017, emphasized that input tax credit would not be available on goods or services used for personal consumption.

The AAR examined the nature of the transportation service provided, emphasizing that it was for the personal use or comfort of employees. Quoting Section 2(60) of the CGST/TGST Act’2017, which defines ‘input service’ as any service used or intended to be used by a supplier in the course or furtherance of business, the AAR concluded that the service of transportation of employees does not fall under the definition of ‘input service.’ It is deemed to be for personal consumption or comfort and is not used in the course of business.

Conclusion:

In conclusion, the AAR’s ruling provides valuable insights into the GST implications and eligibility for Input Tax Credit in cases where employers provide canteen and transportation facilities to their employees. The clarity provided by the AAR ensures that perquisites provided under employment agreements are generally exempt from GST. However, it underscores that charging for such services for business purposes makes them taxable.

The ruling also emphasizes the importance of the obligatory nature of providing these facilities under relevant laws, such as the Factories Act, 1948, for claiming Input Tax Credit. The nuanced analysis of canteen and transportation services, considering their nature, purpose, and statutory obligations, adds significant clarity for businesses navigating the complexities of GST regulations.

This detailed analysis not only clarifies the specific implications of the AAR Telangana ruling for Kirby Building Systems but also provides a broader understanding of the principles governing GST and Input Tax Credit in similar scenarios. As businesses continue to adapt to evolving tax landscapes, such rulings play a crucial role in guiding compliance and decision-making processes.

Read AAAR Order: AAAR Telangana Denies ITC on Employee Transport Due to Lack of Statutory Obligation