2023 (4) TMI 297 - AAR - GST

Employer subsidized canteen food deductions not taxable supply under Section 7 CGST Act 2017

The AAR Gujarat ruled that subsidized deductions made by an employer from employees for factory canteen food do not constitute a supply under Section 7 of ... Supply or not - subsidized deduction made by the applicant from the employees, who are availing food in the factory - Input Tax Credit of GST charged by the CSP for the canteen services for its employees where the canteen facility is mandatory in terms of Section 46 of the Factories Act, 1948. Whether the subsidized deduction made by the applicant from the employees, who are availing food in the factory would be considered as a 'supply' under the provisions of section 7 of the CGST Act, 2017? - HELD THAT:- In terms of Section 7 ibid, supply means all forms of 'supply' of goods/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. The exception being Schedule I, which include the activities made or agreed to be made without a consideration and Schedule III, which includes activities which shall be treated neither as a supply of goods or services. The applicant's case is that they employ more than 250 persons who are full time employees and who have been provided with canteen facility in terms of section 46 of the Factories Act, 1948 read with Gujarat Factories Rules, 1963 - Now in terms of Circular No. 172/04/2022-GST, it is clarified 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. Thus, the subsidized deduction made by the applicant from the employees who are availing food in the factory would not be considered as a 'supply; under the provisions of section 7 of the CGST Act, 2017. Whether Input Tax Credit of GST charged by the CSP for the canteen services for its employees where the canteen facility is mandatory in terms of Section 46 of the Factories Act, 1948 read with Gujarat Factories Rules, 1963? - HELD THAT:- Input Tax Credit will be available to the appellant in respect of food and beverages as canteen facility is obligatorily to be provided under the Factories Act, 1948, read with Gujarat Factories Rules, 1963 as far as provision of canteen service for full time/direct employees working on permanent basis at the factory is concerned. It is further held that the ITC on GST charged by the canteen service provider will be restricted to the extent of cost borne by the appellant only. Issues Involved:1. Applicability of GST on the amount representing the employee's portion of canteen charges recovered from employees.2. Eligibility of Input Tax Credit (ITC) for GST charged by the canteen service provider for canteen services provided to employees.Summary of Judgment:Issue 1: Applicability of GST on Employee's Portion of Canteen ChargesThe primary issue was whether GST is applicable on the amount representing the employee's portion of canteen charges recovered/collected by the applicant from its employees and paid to the canteen service provider on behalf of the employee.The applicant argued that the canteen facility is provided as mandated by Section 46 of the Factories Act, 1948, and that the amount collected from employees is without any commercial objective or profit margin. The applicant relied on Circular No. 172/04/2022-GST, which states that perquisites provided by the employer to the employee in terms of a contractual agreement will not be subjected to GST.The Authority held that the subsidized deduction made by the applicant from the employees who are availing food in the factory would not be considered as a 'supply' under the provisions of Section 7 of the CGST Act, 2017. Therefore, GST is not leviable on the amount representing the employee's portion of canteen charges.Issue 2: Eligibility of Input Tax Credit (ITC)The second issue was whether the applicant is eligible to take ITC for the GST charged by the canteen service provider for canteen services provided to its employees where the canteen facility is mandatory under Section 46 of the Factories Act, 1948.The applicant contended that they are mandated to provide canteen facilities under the Factories Act, and thus should be eligible for ITC. They relied on Circular No. 172/04/2022-GST, which clarifies that the proviso after sub-clause (iii) of clause (b) of Section 17(5) of the CGST Act is applicable to the whole of clause 17(5)(b).The Authority held that ITC will be available to the applicant in respect of food and beverages as the canteen facility is obligatorily provided under the Factories Act, 1948, read with Gujarat Factories Rules, 1963. However, ITC on GST charged by the canteen service provider will be restricted to the extent of the cost borne by the applicant only, disallowing proportionate credit to the extent embedded in the cost of goods recovered from employees.Ruling:1. GST is not leviable on the amount representing the employee's portion of canteen charges recovered/collected by the applicant from its employees and paid to the canteen service provider.2. ITC will be available to the applicant on GST charged by the service provider for the canteen facility provided to its direct employees, restricted to the extent of the cost borne by the applicant.