Employers, especially manufacturers, provide canteen facility to workers working under them. Generally, these canteen facilities are arranged by the corporates for their employees which is either run by a third-party vendor and these expenses are borne by the employer or is completely arranged by the employer himself for the benefit and welfare of the employees. In both the cases, that is outsourced canteen or home run canteen, employer incurs various costs on which GST is paid by him. With the clarification issued by CBIC on 06.07.2022 through Circular No. 172/04/2022-GST about proviso in clause (b) of sub section (5) of section 17, a need for understanding the implications of GST on Food Facilities within the organisation rises.

Let us understand the practical aspects related to the same in detail.

Taxability Under CGST Act: Scope of Supply

The first and foremost question which rises in mind is that whether food services provided by employer will be taxable under the CGST Act? Again, what would be the answer in case full amount is recovered or nominal value is recovered or no value is recovered?

As per the CGST Act, 2017, those transactions which are covered under “supply” will be liable to GST and the scope of supply is defined under Section 7 of the CGST Act, 2017:

• As per clause (a) of sub section (1) of section 7 of the CGST Act, 2017: “all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business”.
• Also, clause (b) of entry 6 stated under schedule II of the CGST Act, 2017 categorises the supply of goods being food or any other article for human consumption as supply of service. So, where any consideration is charged by the employer from employee the said transaction will be covered under supply.
• Further, clause (c) of sub-section 1 of section 7 of CGST Act, 2017, reads with entry 2 of schedule I: supply of goods or services or both between related persons or between distinct persons as specified in section 25, made or agreed to be made without a consideration will be considered as supply, when made in the course or furtherance of business. As per explanation to section 15 of the CGST Act, 2017, the person shall be deemed to be a related person if they are employer and employee.

Thus, we can say that any goods or services provided by employer to employee will be taxable under GST whether any consideration is charged or not.

The CBIC Press Release of 10th July 2017

However, CBIC issued a press release on 10th of July 2017 to provide clarity on taxation of perquisites provided by the employer to the employees. In the press release it was stated that supply by the employer to the employee in terms of contractual agreement entered between the employer and the employee (part of salary / CTC), will not be subjected to GST.

Further, as it is immaterial that whether any amount is charged or not as discussed earlier, the above analysis holds good in all cases i.e., where full amount is recovered or nominal value is recovered or no value is recovered.

Valuation of Supply: Application of Rule 28

Now the question comes that if food facility given by the employer is not covered under employee’s CTC and value of the same is more than ₹ 50,000 per year then it is taxable. But on what value the tax liability will be discharged? Again what would be the answer in case if full amount is recovered or nominal value is recovered or no value is recovered?

Generally, as per sub section (1) of section 15, the value of supply of goods or services or both shall be the transaction value, which is the price actually paid or is payable for the said supply, but this will be the scenario, where the supplier and recipient are not related and the price charged is the sole consideration.

However, as employer and employees are related as per explanation to section 15, transaction value will not be considered as the value of supply of goods or services, hence, the value of supply of goods or services in such case will be derived in accordance with Rule 28 of CGST Rules, 2017:

As per Rule 28, the value of the supply between related or distinct persons shall be:

1. Open market value of such supply;
2. If the open market value is not available, be the value of supply of goods or services of like kind and quality;
3. If the value is not determinable under clause (1) or (2), be the value as determined by the application of rule 30 or rule 31, in that order:

In the above case, the second proviso is not applicable since the employees would be unregistered and they will not be able to take input tax credit.

Thus, the Open Market Value will be the value of supply.

It is immaterial whether the employer is charging from the employees at such amount which is equal to his cost or plus margin or at concessional rate; the applicable value for GST shall be the open market value as per Rule 28. Hence, an employer shall ensure that tax is discharged at open market value.

Applicable GST Rate: 5% Restaurant Services

In terms of Notification No. 20/2019-CT (Rate) dated 30th Sep, 2019, restaurant services are taxed at the rate of 5%. As per the notification, 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”

Canteen food supplies are meant for human consumption. Hence, the same is classified under Restaurant services and is taxable at 5%. However, one of the conditions prescribed under this entry is that input tax charged on goods or services shall not be taken.

Therefore, an employer discharging tax under this entry shall ensure that input tax credit on canteen expenses has not been availed.

Also, one needs to go through Explanation 4 of the notification which specifies that:

• (a) Credit of input tax charged on goods or services used exclusively in supplying this food service has not been taken; and
• (b) Credit of input tax charged on goods or services used partly for supplying food service and partly for effecting other supplies eligible for input tax credits, is reversed as if supply of food service is an exempt supply and attracts provisions of sub section (2) of section 17 of the CGST Act, 2017 and the rules made thereunder.

ITC Availability & CBIC Circular No. 172/04/2022

As per the clarification received from CBIC in Circular No. 172/04/2022-GST, it is clarified that the proviso after sub-clause (iii) of clause (b) of sub-section (5) of section 17 of the CGST Act is applicable to the whole of clause (b) of sub-section (5) of section 17 of the CGST Act. It implies that input tax credit in respect of such goods or services or both which are blocked under clause (b) of sub-section (5) of section 17 shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

Hence, if canteen facility is required to be provided under obligation of any act like Section 46 of the Factories Act, 1948, then credit on providing such facility shall be available to the employer.

However, as discussed above in the section of rate applicability, the condition for charging GST at the rate of 5% is not to take input tax credit on goods or services used exclusively in supplying this food service. Moreover, common credit like credit on admin expenses, etc. which is used partly for supplying food service and partly for effecting other taxable supplies eligible for input tax credits, needs to be reversed as if supply of food service is an exempt supply and attracts provisions of sub-section (2) of section 17 of the CGST Act, 2017 and the rules made thereunder.

Hence, even when it appears that the scope of input tax credit has been widened and it would now be made available in respect of goods or services that are obligatory for an employer to provide to its employees under any law for the time being in force, input tax credit with respect to canteen would not be available when canteen facility is provided to employees not as a part of employment contract as in such case employer needs to discharge his output tax liability as per Notification No. 20/2019 dated 30th September 2019 at concessional rate of 5% which restricts claim of input tax credit.

Comprehensive Summary Across Scenarios

Conclusion

It is evident from the above analysis that food facility to employees if not forming part of their salary would bring a cost burden on the assessee as Goods and Service Tax charged on goods or services or both used in supplying such services will not be available to the assessee and additionally employer would be liable to pay output tax on market value of food supplied to employees at the rate of 5%.

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Author may be reached at: shubham22ag23@yahoo.com and eboard@icai.in