2023 (4) TMI 298 - AAR - GST

Employee canteen deductions don't constitute supply under section 7 CGST Act, ITC available for obligatory services

AAR Gujarat ruled that subsidized canteen deductions from employees availing factory/corporate office food services do not constitute supply under section ... Scope of supply - whether the subsidized deduction made by the applicant from the employees who are availing food in the factory/corporate office would be considered as a 'supply' under the provisions of section 7 of the CGST Act, 2017? - Circular No. 172/04/2022-GST - HELD THAT:- It is evident that [a] the canteen facility is provided by the applicant to the full time employees of its corporate office as mandated in Section 23 of the Gujarat Shops and Establishment (Regulation of Employment and Condition of Service) Act, 2019, is concerned; and [b] the applicant has provided [one page] a copy of the agreement for cafeteria /canteen services to employees. Hence, in terms of the clarification issued by the Board vide Circular No. 172/04/2022-GST, at para 5, we hold that the subsidized deduction made by the applicant from the employees who are availing food in the Corporate Office 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 would be eligible for availment by the applicant? - 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 and Gujarat Shops and Establishment (Regulation of Employment and Condition of Service) Act, 2019 as far as provision of canteen service for full time/direct employees working on permanent basis at the factory/corporate office 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. Whether the subsidized deduction made by the applicant from the employees who are availing food in the factory/corporate office would be considered as a 'supply' under the provisions of section 7 of the CGST Act, 2017 and the GGST Act, 2017Rs.2. If yes, whether GST is applicable on the amount deducted from the salaries of its employeesRs.3. If yes, on what portion GST will be applicable, i.e., the amount paid by the applicant to the canteen service provider or only on the amount recovered from the employeesRs.4. Whether Input Tax Credit (ITC) of GST charged by the canteen service provider would be eligible for availment to the applicantRs.Summary:1. Consideration of Subsidized Deduction as 'Supply':Factory:The applicant provides canteen facilities to its employees as mandated by Section 46 of the Factories Act, 1948. This facility is managed by a Canteen Service Provider (CSP), and the applicant recovers a portion of the cost from the employees' salaries. The applicant argued that this arrangement should not be considered as 'supply' under Section 7 of the CGST Act, 2017. The Authority for Advance Ruling (AAR) referred to Circular No. 172/04/2022-GST, which clarifies that perquisites provided by the employer to the employee in terms of a contractual agreement are not subject to GST. Since the canteen facility is provided as a statutory obligation and not as a business activity, the subsidized deduction from employees does not qualify as 'supply' under Section 7 of the CGST Act, 2017.Corporate Office:The canteen facility at the corporate office is provided under Section 23 of the Gujarat Shops and Establishment (Regulation of Employment and Condition of Service) Act, 2019. The AAR found that this facility is also provided as a statutory obligation. Therefore, the subsidized deduction from employees availing food at the corporate office would not be considered as 'supply' under Section 7 of the CGST Act, 2017.2 & 3. Applicability of GST on Amount Deducted from Salaries:Since the subsidized deduction from employees is not considered as 'supply,' the questions regarding the applicability of GST on the amount deducted from salaries and the portion on which GST would be applicable are rendered infructuous.4. Eligibility for Input Tax Credit (ITC):The applicant is mandated to provide canteen facilities under the Factories Act, 1948, and the Gujarat Shops and Establishment (Regulation of Employment and Condition of Service) Act, 2019. Section 17(5)(b) of the CGST Act, as amended effective from 1.2.2019, allows ITC on goods or services that an employer is obliged to provide to employees under any law. Circular No. 172/04/2022-GST further clarifies this provision. Therefore, the applicant is eligible to avail ITC on GST charged by the CSP to the extent of the cost borne by the applicant for providing canteen services to its direct employees. However, ITC is disallowed proportionately to the extent embedded in the cost recovered from employees.RULING:1. The subsidized deduction from employees availing food in the factory/corporate office is not considered as 'supply' under Section 7 of the CGST Act, 2017 and the GGST Act, 2017.2 & 3. Questions regarding the applicability of GST on the amount deducted from salaries and the portion on which GST would be applicable are rendered infructuous.4. ITC on GST charged by the CSP is available to the applicant for canteen facilities provided to direct employees in the factory and corporate office, restricted to the cost borne by the applicant.