It is very common that many factories and offices provide canteen facilities to their employees. Such facility may be provided as a matter of compulsion or as per the terms of employment or otherwise. The canteen facility may be provided to employees at free of cost or concessional rate or on chargeable basis.
The GST law with regard to food and beverages has created many confusions. Confusions prevail with regard to classification, rate as well as input tax credit.
As we know, food and beverages per se, are goods. However, if the food and beverages are supplied at certain places, the same becomes service. The term food and beverages have not been defined in GST law.
Schedule II classifies supply of food or drinks as service in certain cases where 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. In other words, if food or drinks are supplied as a part of service for consideration, the activity amounts to service. If the food or drinks are supplied as a part of service without consideration, then the same shall not amount to service.
“(xxxii) ‘Restaurant service’ means supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied.”
“xxxiii) ’Outdoor catering’ means supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, at Exhibition Halls, Events, Conferences, Marriage Halls and other outdoor or indoor functions that are event based and occasional in nature.”
The GST rate for food (CH 2106), beverages (CH 2202) are provided in Notification No. 1/2017-CGST (R) and most of the food preparation and beverages attracts 18% GST. GST rate for restaurant service and catering service is provided in Notification No. 11/2017-CGST (R) and the rate specified is 5% subject to the condition that ITC shall not be availed.
Section 17(5) provides certain restrictions for availing ITC on food, beverages and outdoor catering. It’s a non-obstante clause thereby overrides the provisions of section 16(1) and 18(1). Section 17(5) provides that input tax credit shall not be available in respect of interalia, food and beverages, outdoor catering etc.
The said provision also specifies that ITC on food and beverage is available if the outward taxable supply is also in the same category or the same are used as an element in the taxable outward supply being composite supply or mixed supply.
It is important to understand the meaning of the term ‘in respect of’. The Hon. Supreme Court in the case of State Of Madras vs M/S. Swastik Tobacco Factory 1966 AIR 1000 (S.C.) held that Indian tax laws use the expression “in respect of” as synonymous with the expression “on”. The expression “in respect of the goods” in r. 5(1)(i) of the Rules means only “on the goods”. Even if the word “attributable” is substituted for the words “in respect of”, the result will not be different, for the duty paid shall be attributable to the goods. If it was paid on the raw material it can be attributable only to the raw material and not to the goods.
From the above, the restriction of ITC under section 17(5) is on supply of food & beverages and outdoor catering only and not on restaurant service. It may be incorrect to expand the meaning of food and beverages to restaurant service for the purpose of this provision. The proviso to this section allows ITC where food and beverage is part of other taxable outward supply. For example, if food and beverage is part of accommodation service, credit on the same is allowed. The law does not require to segregate the element of food and beverage from any outward supply and disallow the credit on food and beverage.
It is also evident from another logic. If food and beverages are given as an obligation under the provisions of any law, the ITC on the same is available. If the supply of food and beverages is assumed to be synonym with restaurant service (canteen service), even if it is given as per the mandatory requirement of any law, the credit on the same shall not be available because the rate notification specifies mandatory 5% GST without input tax credit on the supply of restaurant service, if canteen service is held to be an outward taxable supply.
In the case of Bhimas Hotels Pvt Ltd V. UOI, WP 217 of 2017, Hon. Andhra High Court held that once the activity undertaken by the petitioner in the form of supply of food to its workers at a subsidized rate is understood to be part of their industrial obligation, it is unthinkable that the same can be construed as service falling within the definition of the expression service under Section 65B(44) of the Finance Act.
It is also stated in the above case that section 2(rr) of the Industrial Disputes Act, 1947 “wages” means all remuneration capable of being expressed in terms of money, which would, if the terms of employment, expressed or implied, were fulfilled, be payable to a workman in respect of his employment, or of work done in such employment, and includes- (i) such allowances (including dearness allowance) as the workman is for the time being entitled to; (ii) the value of any house accommodation, or of supply of light, water, medical attendance or other amenity or of any service or of any concessional supply of food grains or other articles; (iii) any travelling concession; (iv) any commission payable on the promotion of sales or business or both.
The AAR decisions which have held on the basis of provisions prior to 01.10.2019 that providing food and beverage is outdoor catering service, is liable for payment of GST, covered under restriction under section 17(5) etc are irrelevant after the amendment.
Thus, we may say that the canteen service provided by the employer to employee is a condition to the employment and therefore, it is not amount to providing taxable outward supply.
Prior to 01.04.2011 the phrase ‘activities relating business’ was included in the definition of input service under the provisions of Cenvat Credit Rules. Various courts have held that canteen service is an activity relating to business and therefore, cenvat credit on the same is eligible.
Further, if the legislative intention was to disallow credit on all supplies consumed by employees, separate sub-clause (b) which includes food and beverages, outdoor catering etc which are also meant for consumption of employee would not have been there. It is a settled legal principle that one provision cannot be interpreted to make other provision redundant.
Definition of business in GST Act includes any activity or transactions in connection with or incidental or ancillary to any trade, commerce, manufacture, profession etc.
Thus, any welfare activities or facilities to employees including canteen service is not meant for personal consumption of the employee. Only where the personal obligation of the employee is met with by the employer, the same amounts to personal consumption of the employees.
In view of the above, discussion, we may conclude that canteen service is not included in section 17(5). There is no restriction for availing ITC on the restaurant service or canteen service.
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