THE Rs. 30 THALI CONTROVERSY - PERQUISITE OR TAXABLE SUPPLY UNDER GST?

When Welfare Meets Tax Law

In today's corporate world, the employer-employee relationship has shifted away from just exchanging labour for wages. More companies are now investing in employee benefits like subsidised meals, transportation, insurance, and wellness programmes. Of these, the factory canteen remains one of the most common and noticeable welfare initiatives. However, under the Goods and Services Tax (GST) regime, what seems like a simple HR benefit can often lead to complex tax disputes.

This issue typically occurs within a common commercial setup. In this scenario, a third-party contractor provides food to the employer at full market price. The employer charges employees a reduced, subsidised fee and covers the remaining cost as part of employee welfare expenses. The key question is whether this partial recovery is considered a taxable supply by the employer to the employee or if it remains outside the GST scope as a contractual benefit.

To analyse this question systematically, consider these key facts: the contractor charges Rs. 100 per thali to Aayra Kapoor Ltd., which only recovers Rs. 30 from each employee, absorbing the remaining Rs. 70. While the math is straightforward, the legal aspects are complex. GST law mandates a thorough review of the definition of supply, the treatment of employer-employee transactions, the implications of related person provisions, and the guidance provided by the Departmental Circular.

This article deliberately examines the issue from multiple statutory and interpretational perspectives so that the reader can appreciate the true crux of the controversy. The discussion moves sequentially through the definition of supply, the employer-employee framework, the related-person fiction, the gift exclusion, and the valuation provisions under Rule 28. By analysing the issue through these distinct yet interconnected lenses, the article seeks to reach a legally coherent and practically defensible conclusion regarding the taxability of subsidised canteen recoveries.

Statutory Foundation - Section 7 of the CGST Act

Relevant statutory provision

Section 7(1)(a) of the CGST Act provides:

'Supply includes 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.'

Any GST enquiry must logically begin with Section 7 because taxability arises only if an activity qualifies as a 'supply.' The provision makes it clear that three essential ingredients must coexist: there must be a supply of goods or services or both, the supply must be for consideration, and it must be in the course or furtherance of business. If any one of these elements fails, the charging provision collapses.

In the case of subsidised canteen recoveries, the presence of consideration is often mechanically assumed because the employer does collect an amount from employees. However, the more nuanced enquiry is whether the employer can truly be said to be making a supply in the course or furtherance of business. Where the canteen facility is embedded in the employment framework and operates as a welfare measure rather than a revenue stream, the character of the transaction may shift away from a commercial supply model. This conceptual distinction becomes pivotal in light of the following clarification given vide Circular No. 172/04/2022 GST dated 06.07.2022:

Perquisites provided by employer to the employees as per contractual agreement

Issue

Whether various perquisites provided by the employer to its employees in terms of contractual agreement entered into between the employer and the employee are liable for GST?

Clarification

Schedule III to the CGST Act provides that 'services by employee to the employer in the course of or in relation to his employment' will not be considered as supply of goods or services and hence GST is not applicable on services rendered by employee to employer provided they are in the course of or in relation to employment.

2. Any perquisites provided by the employer to its employees in terms of contractual agreement entered into between the employer and the employee are in lieu of the services provided by employee to the employer in relation to his employment. It follows therefrom that perquisites provided 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 when the same are provided in terms of the contract between the employer and employee.

Circular No. 172 anchors the non-taxability of employer-provided perquisites solely on their being supplied in terms of the contractual employment arrangement. The Circular does not prescribe any independent requirement of 'nominal recovery.' The quantum of recovery may at best serve as a factual indicator of whether the arrangement retains its character as a perquisite or assumes a commercial colour.

Employer and Employee as Related Persons - Explanation to Section 15

Before examining valuation issues, it is necessary to consider an important statutory fiction that often influences departmental thinking.

The Explanation given after Section 15 of the CGST Act provides as follows:

For the purposes of this Act, -

(a) Persons shall be deemed to be 'related persons' if-

(i)....

(ii)....

(iii) such persons are employer and employee.

Thus, designating employer and employee as related persons can, in some cases, alter the simple use of transaction value. This provision is sometimes used by field formations to assert that even a subsidised recovery should be compared to the open market value of the food provided by the contractor.

However, the statutory sequence under GST must be applied with conceptual clarity. The valuation provisions governing related-party transactions apply only after it is first established that a taxable supply exists between the employer and the employee. The law does not permit the valuation machinery to run ahead of the charging provision. Where, in terms of Circular No. 172, the canteen facility is recognised as a contractual perquisite forming part of the employment arrangement, the activity itself falls outside the ambit of supply at the threshold. In such a situation, the deeming fiction in Section 15 treating the employer and employee as related persons cannot, by itself, generate a tax liability. Valuation rules are essentially computational in nature - they quantify the value of a taxable supply but cannot create one. Consequently, unless the foundational requirement of supply is first satisfied, the related-person valuation framework under Section 15, read with Rule 28, remains inoperative.

Proviso to Paragraph 2 of Schedule I - Why the Gift Route Does Not Apply

In discussions about employer-employee transactions, the gift exclusion in Schedule I is occasionally mentioned. However, a careful review shows its importance for subsidised canteen cases is very limited.

Theproviso to Paragraph 2 of Schedule I states:

'Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.'

This proviso addresses a specific situation involving voluntary gifts by the employer. In the present scenario, Aayra Kapoor Ltd. is not making a gift. The employee contributes Rs. 30 towards the meal, and the arrangement is covered by an organised welfare policy. The transaction, therefore, lacks the essential element of gratuitous transfer that characterises a gift.

Therefore, the gift proviso neither directs nor significantly advances the analysis of recoveries from subsidised canteens. The appropriate analytical approach continues to be the concept of employment perquisites, as outlined in Circular No. 172. Viewing the canteen subsidy as a gift often complicates rather than clarifies the matter.

Section 15 - Value of Supply

Relevant statutory provision

Section 15(1) provides:

'The value of a supply of goods or services or both shall be the transaction value, that is, the price actually paid or payable for the said supply where the supplier and the recipient are not related and the price is the sole consideration.'

Relevance in employer-employee situations

Because the statute deems employer and employee to be related persons, the direct application of transaction value under Section 15(1) becomes unavailable if a supply is assumed. This is the principal reason why departmental officers sometimes proceed to invoke Rule 28 in canteen matters. Yet, once again, the threshold question must not be overlooked. If the activity itself is outside the scope of supply by virtue of the Circular, the valuation debate becomes largely academic. The machinery provisions of valuation cannot be pressed into service unless the charging provision is first satisfied. This sequencing is fundamental to sound GST analysis.

Rule 28(1) - Valuation between Related Persons

Rule 28(1) of the CGST Rules lays down the method for determining the value of supplies made between related persons. Recognising that the price charged between related parties may not always reflect the true commercial value, the Rule provides a structured hierarchy for valuation. In the first instance, the value is to be taken as the open market value of the supply, that is, the price at which such goods or services are ordinarily supplied to an unrelated customer. Where the open market value is not available, the Rule permits adoption of the value of like kind and quality, meaning the value of similar goods or services supplied under comparable circumstances. If both these benchmarks are not ascertainable, the value is to be determined on the basis of cost of provision plus ten per cent, thereby ensuring a reasonable proxy for market value. These methods, however, operate subject to the important provisos contained in the Rule, including the relaxation where the recipient is eligible for full input tax credit. The provision thus functions as a valuation safeguard in related-party transactions, but, as discussed earlier, it becomes relevant only after the existence of a taxable supply is first established.

Departmental argument and its limitations

In some Departmental Audits, it is argued that because the contractor charges Rs. 100 per thali and the employer and employee are related, the open market value of Rs. 100 should be used for GST purposes, even if only Rs. 30 is actually recovered. Although this argument seems sound, it overlooks the core requirement that a taxable supply must first exist for the employer to be liable.

Circular No. 172 clearly indicates that where the canteen facility is provided as a contractual perquisite, the activity itself is not to be treated as a supply. In such circumstances, Rule 28 simply does not get triggered. It is a valuation mechanism, not a charging provision. Treating it as the starting point reverses the statutory logic.

Contractual Perquisite Test

Considering the statutory context and Circular No. 172, the main question in cases involving subsidised canteen facilities is whether the benefit is part of the contractual employment agreement. If the facility is clearly integrated into the employment arrangement and remains an employee welfare measure, it generally does not qualify as a supply at the initial stage. Therefore, the following analysis will evaluate the current facts within this legal framework.

Applying the Principles to the Rs. 30 Thali Case

Applying the above legal framework to the present facts, the contractor charges Rs. 100 per thali to Aayra Kapoor Ltd., while the company recovers Rs. 30 from employees and bears the balance Rs. 70 as part of its employee welfare expenditure. The decisive enquiry, in the light of Circular No. 172, is not confined to the arithmetic of recovery but is centred on the true character of the arrangement between the employer and the employee.

If the employment contracts, HR policy, standing orders, or other contemporaneous records of Aayra Kapoor Ltd. demonstrate that the canteen facility is an established employee welfare measure forming part of the overall employment package, the recovery of Rs. 30 assumes the character of an internal cost-sharing mechanism within the employment framework. In such a situation, the employer cannot be said to be engaged in an independent business of supplying food to employees. Rather, the facility operates as a perquisite provided in lieu of services rendered by employees, thereby attracting the protective umbrella of Circular No. 172.

Once this foundational position is established, the GST enquiry effectively concludes at the threshold. The activity falls outside the ambit of 'supply' under Section 7, and consequently, the deeming fiction of related persons under Section 15 and the valuation machinery under Rule 28 do not get triggered.

Input Tax Credit Dimension - Section 17(5)(b)

Section 17(5)(b)(i) blocks ITC on food and beverages except in specified situations. The proviso to this clause, however, carves out an important relaxation by providing that input tax credit shall be available where an inward supply of such goods or services is used by a registered person for making an outward taxable supply of the same category of goods or services or as an element of a taxable composite or mixed supply.

In the fact pattern under discussion, the primary position taken in this article is that the subsidised canteen facility provided by Aayra Kapoor Ltd. forms part of the contractual employment arrangement and, in terms of Circular No. 172, does not constitute an outward taxable supply. If this position is sustained, the employer is not regarded as making a taxable outward supply of food services to employees. In such a scenario, the benefit of the above proviso-linked to making an outward taxable supply of the same category-may not strictly apply.

However, in cases where the department disputes the perquisite character and the employer, as a matter of abundant caution or litigation strategy, discharges GST on the employee recoveries treating them as taxable outward supplies under SAC 996333, a strong and plausible argument emerges for availing input tax credit of the GST charged by the contractor (classified under SAC 996337). This is because the inward supply of food services is then used to make an outward taxable supply of the same broad category of services. In such a situation, Aayra Kapoor Ltd. would be eligible to avail full input tax credit of the tax charged by the contractor, notwithstanding the fact that the company recovers only Rs. 30 from employees while having borne GST on the full value of Rs. 100, since the law does not mandate any proportional restriction once the inward supply is used for making a taxable outward supply of the same category.

Accordingly, the availability of ITC to Aayra Kapoor Ltd. is closely linked to the primary characterisation of the canteen arrangement. Where the facility is successfully positioned as a non taxable perquisite mandated or embedded in employment terms, ITC entitlement would ordinarily hinge on the separate statutory obligation test under Section 17(5)(b). Conversely, where the employer elects or is compelled to treat the recovery as a taxable outward supply, the proviso relating to the same category outward supply provides a supportable basis for ITC eligibility, subject to overall factual consistency and compliance

Documentation - The Decisive Factor in Practice

Experience in GST litigation repeatedly demonstrates that documentation often proves more decisive than theoretical interpretation. Employers seeking to sustain the position that subsidised canteen recoveries are non taxable perquisites should ensure that the welfare character of the facility is clearly reflected in their records. Employment contracts or HR manuals should expressly recognise the canteen as part of employee welfare. Internal approvals evidencing the company's decision to subsidise meals and cost sheets demonstrating absence of profit provide additional support.

Substance Speaks Louder Than Numbers

The GST treatment of subsidised canteen recoveries cannot be decided merely by looking at the numbers involved. The real test lies in understanding the arrangement's true character. Circular No. 172 clearly recognises that genuine perquisites provided by an employer to employees as part of the contractual employment framework are not intended to be brought within the GST net. Therefore, where the canteen facility is fundamentally a welfare measure and not a commercial food-supply activity, the law, when read in its proper spirit, supports a conclusion of non-taxability.

What ultimately determines the sustainability of this position is not the quantum of recovery alone but the overall consistency of the employer's approach. The HR policy, employment contracts, accounting treatment, and day-to-day implementation must collectively demonstrate that the facility is designed as an employee benefit rather than a revenue-generating exercise. When policy intent, documentation, and actual conduct align, the tax position becomes significantly more robust and defensible.

In essence, GST in such cases looks beyond arithmetic and focuses on commercial substance. Where substance clearly reflects employee welfare embedded in the employment relationship, the law is intended to respect that reality rather than artificially impose tax on what is, in truth, a part of the employer-employee compact.

Finally, in GST, numbers may start the enquiry, but substance ultimately decides the tax.

*******