1. The taxability of the ‘Canteen Facility’ to the employees is an area of dispute. It has become more confusing in the light of decisions held by Advance Rulings Authorities. In this article, an attempt has been made to analyze the taxability of canteen facility & ITC availability in a different scenario.
2. Scenario A: – The organization is under Industrial obligation to provide canteen facilities to the employees. Such a facility is covered by employment contracts and forms part of the cost to the company ( C2C).
2.1 Section 7(2) (a) of the CGST Act 2017 read with Entry 1 of Schedule III, states that services by an employee to employer in course of employment shall be neither supply of goods nor services. In the given scenario, since ‘Canteen Facility is covered in the employment contract it can be very well argued that such services are consideration for providing services by Employee to Employer and will not be subjected to GST.
2.2 The same was also clarified via Press Release by the Government of India on 10th July 2017 which stated that “Supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST”
3. Scenario B: The canteen facility is not covered under the employment contract & the nominal amount recovered from the employees
3.1 Recently, AAR Maharashtra held in re of Tata Motors Limited  that a nominal amount from its employees for providing transportation facilities ( the same 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.
3.2 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.
3.3 However, if the establishment is recovering the complete cost from employees/or at a non-subsidized rate then, in that case, GST must be charged, as also affirmed by AAR Kerala and AAAR Kerala in the case of Caltech Polymers (P.) Ltd., In re .
4. Scenario C: Canteen facility provided without consideration :
4.1 As discussed in scenario A above, If such services are covered by employment contract and form part of the cost to the company (C2C) then they are not to be considered as supply. However, if they are not part of C2C then such services will be treated as supply and Entry no 1 of Schedule-III will not apply. In that case, the ‘Canteen Facility’ provided without consideration is covered under the ambit of Supply.
4.2 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.
5. Valuation: – Rule 28 of CGST Rules 2017 deals with the valuation of supply of goods or services or both between distinct or related persons which by virtue states that the value of such supply shall be open market value. Thus, for calculating GST liability,the valuation of canteen services shall be open market values.
6. Rate of Tax: Rate of tax has been prescribed (amended) vide Notification No. 20/2019 – CT ( rates) dated 30 Sep 2019.
|7(1)(ii)||Supply of ‘restaurant service’ other than at ‘specified premises’||2.5 %||Provided that credit of input tax charged on goods and services used in supplying the service has not been taken.|
6.1 Restaurant Service” defined under clause (xxxiii) of the explanation to the notification. The definition of restaurant service includes within its ambit eating joint including mess, canteen, where food or any article for human consumption is supplied.
6.2 “Outdoor Catering” defined under clause (xxxiii) of the explanation &”. Whereas “Outdoor Catering” covers the supply of food and beverages at Exhibition Halls, Events, Conferences, Marriage Halls and other functions.
6.3 ‘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. On the contrary Outdoor Catering is event-based and occasional in nature.
6.4 Therefore, ‘Canteen Facility’s will attract tax rate of 5% (2.5% CGST+2.5% SGST)
7. 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.
7.1 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.
8. Consider the Input Tax admissibility for canteen facility to employees in the following scenarios:-
8.1 Scenario 1: M/S BEL outsourced ‘Canteen Facility to a contractor who provides such services from the premise of the organization only. The Organization is not under any Industrial obligation to provide canteen services to its employees.
8.1.1. Input Tax Credit will not be available since canteen food and beverage services to the employee are blocked credit and covered under Section 17(5) of the CGST Act, 2017.
8.2 Scenario 2: M/S BEL outsourced ‘Canteen Facility to a contractor who provides such services from the premise of the organization only. The Organization is under Industrial obligation to provide canteen services to its employees. A nominal amount of 25/- is recovered from employees towards the canteen facility.
8.2.1 ITC will be available ( w.e.f. 01.02.2019 as per proviso inserted) where it is obligatory for an employer to provide to its employees under any law for the time being in force. However, ITC may not be available the extent amount is recovered from employees in view of Maharashtra AAR as discussed in Para above.
8.2.2 As per Recent Advance Ruling,- Maharashtra in matters of Tata Motors Ltd.’s case (supra) wherein the applicant raised the issue on the admissibility of ITC if part of the tax is borne by its employee and partly by him, it was decided by the Hon’ble AAR that only part of CGST borne by employer i.e. applicant shall be admissible.
8.3 Scenario 3 The organization provides ‘Canteen Facility’s on its own (i.e. not outsourced) and is under Industrial obligation to provide canteen services to its employees.
8.3.1 ITC will not be available if such a facility is considered to be supply and output tax is charged. Notification No 20/2019 Central Tax-(Rate) dated 30th September 2019 clearly specifies that GST Rate for restaurant services from other than specified premises will be 5% and ITC for providing such supply shall not be available. The term specified premises is very clear which is used for restaurants and organizations definitely is not a specified premises.
9. There is a myth that if the taxpayer wants to avail the ITC, then he can charge an 18% rate of tax and take ITC of the same as per entry (ii) of Sl. No. 7 of the rate notification. 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.
10. It is wise to undertake a cost-benefit analysis for the taxpayer before deciding on recovering any amounts. For instance, where the employer decides not to recover any amount towards food provided in the canteen, there is no outward supply in the hands of the employer. The Rate Notification no. 20/2019 – CT ( rates) dated 20 Sep 2019 along with the condition laid down ie GST @ 5% WITH NO ITC, will not have any applicability. As a result, the employer can avail the corresponding credit by virtue of the proviso introduced to Section 17(5)(b).
Conclusion: The changeability of tax on ‘Canteen Facility’ & ITC admissibility depends on various the factors such as employee-employer relationship, consideration involved therein, industrial obligations. One could evaluate the possibility of having appropriate reference of canteen in its employment letter or HR policy. This could also require understanding taxation under Income Tax as perquisite in the hands of employees.
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