Mandatory factory canteen credit is allowed under GST, but only for the employer's own cost contribution.

Input tax credit on GST paid for a mandatory factory canteen is available under the proviso to blocked-credit provisions where the employer is legally required to provide the facility under the Factories Act, 1948. The canteen obligation under Section 46 brought the service within the statutory exception, and the credit was therefore admissible for direct employees. However, the credit is confined to the employer's own cost: any portion recovered from employees is not eligible because the tax burden on that part is borne by employees, not the employer. The advance ruling was modified accordingly, allowing proportionate credit only to the extent of the employer's contribution.

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Issues: (i) Whether input tax credit on GST paid for canteen facility provided to direct employees in the factory is admissible under the statutory exception to blocked credit; (ii) whether such credit is restricted to the extent of the cost borne by the employer.

Issue (i): Whether input tax credit on GST paid for canteen facility provided to direct employees in the factory is admissible under the statutory exception to blocked credit.

Analysis: Section 17(5)(b) of the Central Goods and Services Tax Act, 2017 blocks credit on specified inward supplies, but the proviso inserted with effect from 01.02.2019 makes credit available where the goods or services are obligatory for an employer to provide to employees under any law in force. The canteen obligation under Section 46 of the Factories Act, 1948 brought the facility within that exception. The clarification in Circular No. 172/04/2022-GST dated 06.07.2022 was relied upon to treat the proviso as applicable to the whole of clause (b).

Conclusion: Input tax credit on GST paid for the canteen facility provided to direct employees is admissible.

Issue (ii): Whether such credit is restricted to the extent of the cost borne by the employer.

Analysis: The credit could not extend to the portion of canteen cost recovered from employees, because the tax burden embedded in that recovered portion is borne by the employees and not by the employer. The available credit was therefore confined to the employer's own cost for providing the mandatory canteen service to direct employees.

Conclusion: The credit is restricted to the extent of the cost borne by the employer and proportionate credit attributable to recoveries from employees is not admissible.

Final Conclusion: The advance ruling was modified to allow credit on the mandatory canteen facility for direct employees, while limiting the benefit to the employer's own cost contribution.

Ratio Decidendi: Where an employer is statutorily obliged to provide a service to employees, the proviso to blocked-credit provisions permits input tax credit, but only to the extent the tax burden is actually borne by the employer and not shifted to employees.

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