It is seen that often business entities provide working lunch or canteen services during office hours to employees / workers free of cost or at subsidized rates or against recovery of charges towards canteen services by way of receiving payment from employees or deduction of such amount from salary of employees. Whether such provision of canteen services through a third party contractor for a consideration (whether received or deducted from salary) constitute a supply under GST law, is a subject matter of confusion and dispute between taxpayers and revenue authorities.
In one of the recent advance rulings pronounced by Authority for Advance Ruling, Gujarat in Re: Amneal Pharmaceuticals Pvt. Ltd. (2021) 1 TMI 432 (AAR, Gujarat), a similar issue came up for consideration wherein following query was raised for ruling :
“Whether GST is applicable on the amount recovered from employee on account of third party canteen services which is obligatory under Section 46 of the Factories Act, provided by company?”
In the instant case, applicant was a 100% export oriented unit (EOU) engaged in provision of canteen facilities for employees through third party canteen contractor (outsourced) at its factory. Further, provision of canteen service was mandatory for the applicant u/s 46 of the Factories Act, 1948. The food was being supplied by company at subsidized rates and recovered from employees for further payment to canteen contractor. Thus, it was only a collecting / paying agency for such services.
It contended that such an actually did not constitute a supply liable for GST. It viewed that services in relation to supply of food or beverages by a canteen maintained in a factory covered under the Factories Act, 1948 was exempted under the Service Tax and the basis and concept of levy of tax should not be changed. Further, the applicant was of opinion that this activity does not fall within the scope of ‘supply’ as the same is not in the course or furtherance of its business. It was only facilitating the supply of food to the employees, which is a statutory requirement, and was recovering only employee’s share as actual expenditure incurred in connection with the food supply, without making any profit. Further, such activity was not its main object of business. This was nothing but the facility provided to employee without making any profit and working as a mediator between employee and contractor of canteen service provider. Therefore, in no GST shall be payable by employee to company on the subsidized value of food.
The AAR considered the statutory provisions of GST law and observed that moot point to be decided was whether GST is applicable on the amount recovered from employee on account of third party canteen services which is obligatory under Section 46 of the Factories Act, provided by the company.
The issue thus revolved around the following provisions of GST law.
|Section 2 (31)||Consideration|
|Section 2 (83)||Outward supply|
|Section 2 (105)||Supplier|
|Section 17 (5)||Input tax credit – blocked credits|
It offered food to its employees on subsidized rate whereby employee’s share of cost was being deducted from salary. Moreover, such activity was not their business activity as it was a obligation under Factories Act, 1948.
The AAR observed that definition of ‘outward supply’ u/s 2(83) and ‘business’ u/s 2(17) of CGST Act, 2017 leads to the point that the supply of food by the applicant to its employees would definitely come under clause (b) of Section 2(17) as a transaction incidental or ancillary to the main business. Further, clause 6 of II-Schedule to CGST Act states “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.” to be a supply of service. The AAR further observed that the activity comes under scope of supply as defined in section 7(1) and that applicant is also covered under the scope of ‘supplier’ as per section 2(105) of the CGST Act, 2017.
Further, since the applicant recovered the cost of food from its employees, there is ‘consideration’, as defined in Section 2(31) of the CGST Act, 2017. The argument that such activity is barred for Input Tax Credit (ITC) u/s 17(5) was also of no help.
The AAR concluded that recovery of amount from employees on account of third party canteen services provided by the Company, which is obligatory under Section 46 of the Factories Act, 1948 would come under the definition of ‘outward supply’ as defined in Section 2(83) of the CGST Act, 2017 and therefore, taxable as a supply under GST.
The arguments advanced by the applicant could not find favour with the AAR on simple interpretation of law without going into the sprint of law. The ruling could be twisted the other side if company recovering amount towards canteen facilities was to be considered as pure agent and only recovered actual or less amount, though there is no profit element in the case. Further, whether discharge of statutory obligation by the employer can be considered as a taxable event is also to be debated.