1. An employer may be providing certain facilities (e.g. transportation, canteen, etc.) to its employees as part of the employment contract. For the sake of maintaining accountability, the employer may also be recovering a certain portion of the cost incurred from the salaries payable to the said employees. Now the following issues will arise in the given arrangement:
i. Whether the employer can avail input tax credit (‘ITC’) on the said expenses?
ii. Whether the employer is required to pay the GST on the recoveries made from the employees? If yes, what would be the value on which GST shall be charged?
iii. Whether the employer is required to reverse any ITC related to the cost recovered?
2. Let us delve into the aforesaid issues.
Issue no. 1
3. Whether the employer can avail the ITC on the said expenses? The provisions related to the availment of the ITC are mainly contained u/s 16 & 17 of the CGST Act, 2017. In a nutshell, ITC can be claimed on all the supplies received by the registered person (employer for the present issue) which are used or intended to be used in the course or furtherance of his business. Further Sec. 17(5) contains provisions related to block credits where ITC on certain supplies is not eligible. As far as the present issue is concerned the employer will be in a position to avail ITC related to the transportation expenses (provided the capacity of motor vehicle is 13 persons or more) as well as canteen expenses (provided running the said canteen is an obligation under any law e.g. Factories Act).
Issue no. 2
4. Whether the employer is required to pay the GST on the recoveries made from the employees? Before we advert to our submissions on the issue, it is worthwhile to refer to the two orders passed under the Advance Ruling mechanism.
5. Appellate Authority for Advance Rulings in the State of Kerala in the case of Caltech Polymers Pvt. Ltd. 2018 (18) G.S.T.L. 373 (App. A.A.R. – GST) held that GST shall be payable on the amount recovered from the employees towards the facility of food supplied. Reasoning adopted is as under:
“The crucial aspects to be considered in this case are the elements of “supply” and “consideration”. The appellant company has admitted that they are serving food to the employees for cash, though there is no profit involved in the transaction. In spite of the absence of any profit, the activity of supplying food and charging price for the same from the employees would surely come within the definition of “supply” as provided in Section 7(1)(a) of the GST Act, 2017. Consequently, the appellant would definitely come under the definition of “supplier” as provided in sub-section (105) of Section 2 of the GST Act, 2017. Moreover, since the appellant recovers the cost of food items from their employees, there is “consideration” as defined in Section 2(31) of the GST Act, 2017.”
6. From the above we can infer the reasoning of the Appellate Authority that the employer is serving the food to the employees for cash and since the price is charged for such supply it shall be covered u/s 7(1)(a) of the CGST Act, 2017 and hence the same shall be taxable.
7. Conversely recently the Advance Ruling Authority in the State of Maharashtra in the case of Tata Motors Limited (GST-ARA- 23/2019-20/B-46) held that such cost recovery from the employees shall not be taxable. Reasoning adopted is as under (relevant extract):
“Applicant has submitted that they issue pass only to their employees, so that the transportation facility can be used by such employees, for which nominal amount is recovered on monthly basis. They have also submitted that once, employee ceases to be in employment with Applicant, he/she is not authorized to use the transportation facility. In other words, employer-employee relationship is must to avail this facility…….
In the subject case, the transaction between the applicant & their employees, due to “Employer-Employee” relation as stated by the applicant in their submissions, is not a supply under GST Act….
As per clause 1 of the said Schedule-Ill. Services by an employee to the employer in the course of or in relation to his employment shall be treated neither as a supply of goods nor a supply of services……
Since the applicant is not supplying any services to its employees, in view of Schedule III mentioned above, we are of the opinion that GST is not applicable on the nominal amounts recovered by Applicants from their employees in the subject case.”
8. From the above we can infer the reasoning that (a) employer-employee relationship is must to avail this facility and (b) if such relationship exists then the transaction between the Employer-Employee shall get covered under clause 1 of Schedule III and hence shall not be leviable to tax.
9. Now clearly the reasoning adopted in the first ruling (which is adverse) is not cogent enough as the emphasis is only on the aspect of motive and the price without appreciating the underlying employer-employee contractual relationship. The second ruling (which is favourable) on the other hand has appreciated the underlying employer-employee contractual relationship but has not clinically examined the issue. Therefore the below analysis.
10. Now the levy of tax under GST is on the “supply” of goods or services. The scope of supply is provided u/s 7 of the CGST Act, 2017. Apparently it seeks to cover all forms of supply. However the same would not mean that every receipts or recoveries will imply some supply. This is for the reason that the term “supply” has some boundaries.
11. Oxford Dictionary gives a large number of definitions for the word “supply” but the common feature is that the word means furnishing or providing something which is wanted. Such generic words having wide meaning have to be interpreted considering the context in which they have been used. When the CGST Bill, 2017 was presented before the Parliament the Statement of Objects and Reasons stated that the levy of GST seeks to “subsume” and “converge” what was taxed in the previous regime. Further, the scope of supply u/s 7(1) includes three limbs viz. (a) all forms of supply made for a consideration in the course or furtherance of business (b) import of services and (c) activities specified in Schedule I.
12. The first limb u/s 7(1)(a) covering transactions made for a consideration implies a contractual (oral or written) relationship for seeking (from the point of view of the recipient) and supplying (from the point of view of supplier) the desired object of supply (viz. goods or services) against a consideration. Same can be deduced from the fact that the “consideration” has been made as a vital element to define the scope. Said view further finds support from the decision of Hon’ble Bombay High Court in the case of Bai Manubai Trust v. Suchitra 2019 (31) G.S.T.L. 193 (Bom.) wherein it has been held that the term “supply” requires “enforceable reciprocal obligations”. Applying the same to the present issue we can submit that the cost recovery against the facilities given to the employees is not on account of a desire in the minds of the employee to receive the facilities and pay the consideration for the same. The receipt of facilities is not the object of the employment contract. The object or the bargain of the employment contract is to render services to the employer against the consideration in the form of salary. Facilities are merely part of the bargain to provide the employment services. Therefore we submit that such cost recoveries cannot be treated as a consideration against the facilities provided as that is not what is bargained or the aim of the employment contract and hence the same cannot be covered under the first limb.
13. At this juncture, we also need to consider one more perspective. As stated before, the object of bringing the GST is to “subsume” and “converge” under a unified system the levy of tax on the goods and services what was earlier taxed separately. Therefore the word “services” as understood by the Courts in the earlier regime will be relevant. This is because if such recoveries are sought to be taxed, it must be against the provision of some services (in the nature of facilities). Hon’ble Andhra Pradesh High Court in the case of Bhimas Hotels Pvt. Ltd. v. UOI 2017 (3) G.S.T.L. 30 (A.P.) had an occasion to consider whether supply of subsidized food to the workers by the employer shall be liable to service tax or not? The Court observed that “any supply of subsidized food to the workers by the management of a Company, has to be seen as part of the pay package that the workers have negotiated with the employer.” Therefore it was held that the food supplied by an employer to its employees at a subsidized rate forms part of the wages and shall not attract service tax. We therefore submit that since such recoveries are not the bargain entered into between the employer and the employee but is only a component of such bargain (employment), the recoveries cannot tantamount to a consideration against any supply made by the employer.
14. Second limb dealing with import of services is clearly not applicable in the present issue. The third limb covers activities specified in Schedule I. Now Sec. 7(1)(c) seeks to include within the scope of supply “the activities specified in Schedule I, made or agreed to be made without a consideration”. Therefore for a transaction to be covered within the said limb, it must be specified in Schedule I and if it finds mention in the said Schedule I then the element of consideration shall be inconsequential to determine the chargeability. Sr. No. 2 of the said Schedule I includes “supply” between related persons. Therefore even though employer-employee are considered as related persons, there must be a “supply” between them so as to get covered by the said entry. As observed earlier the term “supply” as covered u/s 7(1)(a) requires the bargain for the desired object. Therefore if the bargain is for the employment services, some recoveries under the said bargain cannot be carved out as a different independent bargain which can be liable to tax.
15. Said issue can be looked at from yet another perspective. The entries included in Schedule I are to be seen in the context of the grand scheme of the GST taxation. All the entries have an implied intent (either to avoid undue ITC benefit or to ensure that the chain till the end consumption is not broken (as GST is a destination-based tax) or to ensure that tax is paid on fair value if the nature of the relationship can influence the price). Therefore between employer and employee if there is no bargain for the desired object then there cannot be any supply. Also, the intent implied in Schedule I does not permit taxing such recoveries. Hence we can submit that as the cost recoveries for the facilities provided are not the bargain with its own aim, such recoveries cannot be treated as a consideration and therefore a supply cannot be assumed.
16. Now the fourth limb (which is invisible) is that the scope of supply has been defined inclusively. Therefore even the transactions ordinarily considered as supply but not specifically included in the three limbs will also be covered within the scope. In the said context we can submit that the scope of supply has to be understood in the context in which the term has been used. As discussed earlier Sec. 7(1)(a) implies a contractual bargain against a consideration. Sec. 7(1)(c) read with Schedule I supports the design of GST and avoid certain mischiefs. Hence we submit that the idea of what has been bargained between the two parties will be pivotal to a supply. Therefore recovery as part of the bargain of the employment contract cannot be construed as the aim in itself as the aim of the bargain shall continue to be employment services and hence the cost recoveries cannot be subjected to tax.
17. This now brings us to Sec. 7(1A). Said provision seeks to treat certain activities or transactions specified in Schedule III as neither supply of goods nor a supply of services. Sr. No. 1 of the said Schedule III covers services by an employee to the employer in the course of or in relation to his employment. We therefore submit that the intent behind the said entry is to exclude the bargain of the employment contract from the purview of GST. It will therefore imply that the recoveries made as a part of the said bargain shall also be outside the purview of GST.
18. We hence submit that the recoveries from the employees for various facilities under the employment contract should not be subjected to tax. Because of aforesaid conclusion, we need not go into the aspects of the valuation.
Issue no. 3
19. Whether the employer is required to reverse any ITC related to the cost recovered? The Advance Ruling Authority of Maharashtra in the case of Tata Motors Limited (supra) answered the question in affirmative by holding that the ITC shall not be admissible on the part of the cost borne by the employee. The Authority relied on the decision in the case of CCE Nagpur vs Ultratech Cements Ltd 2010 (260) ELT 369 (Bom) wherein the Hon’ble Bombay High Court in the CENVAT era held that “once the service tax is borne by the ultimate consumer of the service, namely the worker, the manufacturer cannot take credit of that part of the service tax which is borne by the consumer”. We would however submit that the said decision shall be relevant only if factually it can be established that the proportionate tax element has been recovered from the employees.
20. However one needs to still appreciate whether there are any provisions in the law which allows for the restriction of ITC even if the proportionate cost of the same has been borne by someone else. It is settled proposition that the reversal or restrictions pertaining to ITC has been be expressly provided in the Act (see Collector v. Dai Ichi Karkaria Ltd. 1999 (112) E.L.T. 353 (S.C.)). Also, the principle of unjust enrichment applies to the situations of seeking refund of the tax and not to the situations of availment of ITC. Therefore we may submit that in the absence of any restrictions on ITC, the employer can claim full ITC even if the part of the same may be recovered from the employees. Said view also finds support from the decision in the case of CCE v. Tata Advanced Materials Ltd. (2012 (26) S.T.R. 600 (Kar.)) wherein the Hon’ble Karnataka High Court held that “merely because the Insurance Company paid the assessee the value of goods including the excise duty paid, that would not render the availment of the cenvat credit wrong or irregular”. It was therefore held that in the absence of specific provisions seeking the reversal of credit, the same cannot be recovered.
21. Above discussions thus shows that various dimensions ought to be considered to the issues posed before reaching the answer. It is hoped that the said dimensions are duly considered in times to come to reach a just result.
(Views are strictly personal)