2023 (7) TMI 142 - AAR - GST

Employee salary deductions for canteen food and transport don't constitute taxable supply under Section 7

Gujarat AAR ruled on multiple GST issues involving employee benefits and deductions. The authority held that nominal deductions from employee salaries for ... Supply under section 7 of the CGST Act - perquisites provided by employer to employee in terms of contract (Schedule III and CBIC clarification) - availability of input tax credit subject to section 17(5)(b) proviso - obligatory provision under Factories Act as basis for ITC - ITC restriction for motor vehicles seating capacity more than 13 persons - forfeiture/penalty recoveries under employment contract not considerationSupply under section 7 of the CGST Act - perquisites provided by employer to employee in terms of contract (Schedule III and CBIC clarification) - Deduction from employees for canteen food provided in factory premises constitutes a supply under section 7 of the CGST Act - HELD THAT: - The Authority examined whether the nominal deductions from employees for canteen meals constitute a taxable supply. The canteen is provided pursuant to the employer's statutory obligation under section 46 of the Factories Act, is restricted to employees, and is provided in terms of the employment contract and company policy. Relying on Circular No.172/04/2022-GST and Schedule III principles that perquisites provided by an employer to an employee in terms of the employment contract are not subject to GST, the Authority held that the deduction does not amount to a supply by the applicant under section 7. [Paras 19]The deduction for canteen food is not a supply under section 7 and therefore not taxable.Availability of input tax credit subject to section 17(5)(b) proviso - obligatory provision under Factories Act as basis for ITC - Availability of ITC on GST charged by the canteen service provider (CSP) - HELD THAT: - The Authority considered the amended clause (b) of section 17(5) (w.e.f. 1.2.2019) and CBIC clarifications that the proviso applies to the whole of clause (b). Given that the employer is statutorily obligated under section 46 of the Factories Act (and Gujarat rules) to provide a canteen for employees (other than contract employees), ITC on food and beverages procured from the CSP is admissible to the applicant. The Authority limited ITC to the extent of cost actually borne by the applicant, disallowing proportionate credit to the extent embedded in amounts recovered from employees. [Paras 21, 22, 23]ITC on GST charged by the CSP is available for obligatory canteen services (for non-contract employees) but restricted to the cost borne by the applicant, excluding proportionate credit attributable to recoveries from employees.Supply under section 7 of the CGST Act - perquisites provided by employer to employee in terms of contract (Schedule III and CBIC clarification) - Deduction for non air conditioned bus transportation facility provided to employees constitutes a supply under section 7 of the CGST Act - HELD THAT: - The Authority analysed whether transportation deductions amount to a supply by the applicant. The transport facility is provided only to employees, pursuant to company policy and employment terms, for convenience and safety. Applying Circular No.172/04/2022-GST and the principle that perquisites in terms of employment contract are not taxable, the Authority concluded that the deduction for bus transport does not constitute a supply by the applicant under section 7. [Paras 24, 26]The deduction for bus transportation facility is not a supply under section 7 and therefore not taxable.ITC restriction for motor vehicles seating capacity more than 13 persons - availability of input tax credit subject to section 17(5)(b) proviso - Availability of ITC on GST charged by transport service providers (TSPs) for non AC buses - HELD THAT: - The Authority noted that ITC is available subject to section 16 and the restrictions in section 17(5). The amended section 17(5) from 1.2.2019 permits ITC on leasing/renting/hiring of motor vehicles with seating capacity exceeding 13 persons. The sample agreement indicated buses with capacity over 13 seats; accordingly, the applicant is eligible to claim ITC on GST charged by TSPs provided the buses hired are over 13 seater (w.e.f. 1.2.2019). The Authority limited ITC to the extent of cost borne by the applicant, disallowing proportionate credit attributable to recoveries from employees. [Paras 27, 28, 29]ITC on GST charged by TSPs is available provided the hired buses have seating capacity of more than 13 persons (w.e.f. 1.2.2019), subject to restriction to the cost borne by the applicant and disallowance of proportionate credit linked to employee recoveries.Forfeiture/penalty recoveries under employment contract not consideration - perquisites provided by employer to employee in terms of contract (Schedule III and CBIC clarification) - Taxability of amounts deducted from employees' full and final settlement as notice pay - HELD THAT: - The Authority considered Circular No.178/10/2022 GST which explains that forfeiture of salary or recovery of bond amounts on premature leaving are penalties/deterrents and do not represent consideration for any supply by the employer. The deducted amounts do not result in the employee receiving anything in return and are not consideration for agreeing to tolerate an act. Applying that clarification, the Authority held that such notice pay deductions are not taxable under GST. [Paras 31, 32, 33]No GST is leviable on amounts deducted as notice pay from full and final settlements.Final Conclusion: The Authority ruled that (i) deductions from employees for canteen meals and for non AC bus transport do not constitute supplies by the applicant under section 7 and are not taxable; (ii) ITC is admissible on GST charged by the canteen service provider for obligatory canteen services (non contract employees) and on GST charged by transport service providers where buses exceed 13 seats (w.e.f. 1.2.2019), in each case restricted to the cost borne by the applicant and excluding proportionate credit attributable to recoveries from employees; and (iii) amounts deducted as notice pay are not subject to GST. Issues Involved:1. Canteen Facility and GST Applicability2. Input Tax Credit (ITC) on Canteen Services3. Transportation Facility and GST Applicability4. ITC on Transportation Services5. GST on Salary Deducted in Lieu of Notice PeriodSummary:Canteen Facility and GST Applicability:Issue: Whether the deduction of nominal amount by the applicant from the salary of employees availing food in the factory premises is considered a 'supply' under Section 7 of the CGST Act, 2017.Judgment: The deduction made by the applicant from employees availing food in the factory is not considered a 'supply' under Section 7 of the CGST Act, 2017. The canteen facility is provided in compliance with Section 46 of the Factories Act, 1948, and falls under the perquisites provided by the employer to the employee in terms of a contractual agreement, which is not subjected to GST.Input Tax Credit (ITC) on Canteen Services:Issue: Whether ITC is available to the applicant on GST charged by the CSP for providing catering services.Judgment: ITC is available to the applicant on GST charged by the CSP for providing canteen services to employees other than contract employees, as the canteen facility is obligatory under the Factories Act, 1948. ITC is restricted to the extent of the cost borne by the applicant, disallowing proportionate credit embedded in the cost recovered from employees.Transportation Facility and GST Applicability:Issue: Whether the services by way of non-air-conditioned bus transportation facility provided by TSPs is construed as 'supply of service' by the applicant to its employees under Section 7 of the CGST Act, 2017.Judgment: The transportation facility provided by TSPs is not considered a 'supply' under Section 7 of the CGST Act, 2017. The facility is provided for the convenience and safety of employees and is part of the contractual agreement between employer and employee, which is not subjected to GST.ITC on Transportation Services:Issue: Whether ITC is available to the applicant on GST charged by TSPs for providing non-air-conditioned bus transportation services.Judgment: ITC is available to the applicant on GST charged by TSPs for providing non-air-conditioned bus transportation services, provided the buses hired have more than 13 seats. ITC is restricted to the extent of the cost borne by the applicant, disallowing proportionate credit embedded in the cost recovered from employees.GST on Salary Deducted in Lieu of Notice Period:Issue: Whether GST is applicable on salary deducted in lieu of notice period from the full and final settlement of employees leaving the company without completing the notice period.Judgment: No GST is applicable on the amount deducted towards notice pay. The deduction is considered a penalty for breach of the employment contract and not a consideration for tolerating an act or situation.Ruling:1. Canteen Facility: Not considered a 'supply' under Section 7 of the CGST Act, 2017.2. ITC on Canteen Services: Available with restrictions as per the cost borne by the applicant.3. Transportation Facility: Not considered a 'supply' under Section 7 of the CGST Act, 2017.4. ITC on Transportation Services: Available with restrictions, provided buses have more than 13 seats.5. Notice Pay: No GST applicable on salary deducted for notice period.