Employee recoveries for canteen and transportation services are taxable under GST, only concessional portion exempt under Schedule III

AAR Maharashtra ruled that employee recoveries for canteen and transportation services are taxable under GST laws, as only the concessional portion qualifies as exempt perquisite under Schedule III CGST Act, not the charged amount. Transportation services fall under SAC 9964, taxable at 5% without ITC or 12% with ITC. GST applies only on actual recovery amounts from employees, not the subsidized portion. However, notice pay recoveries for not serving notice period are non-taxable as they constitute penalties rather than consideration for services.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) were:

(a) Whether recoveries made by the Applicant from employees for providing canteen facilities are taxable under the GST lawsRs.

(b) Whether recoveries made by the Applicant from employees for providing bus transportation facilities are taxable under the CGST ActRs.

(c) Whether the Applicant would be exempted under Sl. No. 15 of Notification No. 12/2017-Central Tax (Rate) in respect of bus transportation servicesRs.

(d) If GST is payable on the aforesaid recoveries, what is the value on which GST is payableRs.

(e) Whether notice pay recoveries made by the Applicant from employees for not serving the notice period are taxable under GST lawsRs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Taxability of recoveries for canteen and bus transportation facilities

Relevant Legal Framework and Precedents:

The definition of "supply" under Section 7(1)(a) of the CGST Act requires supply of goods or services for a consideration in the course or furtherance of business. "Business" is defined under Section 2(17) broadly to include trade, commerce, manufacture, profession, vocation, and any activity incidental or ancillary thereto, whether or not for pecuniary benefit.

Schedule III of the CGST Act excludes certain activities from being treated as supply, including "services by an employee to the employer in the course of or in relation to his employment."

Several precedents were cited by the Applicant, including rulings from this Authority and various High Courts, which held that recoveries from employees for facilities like canteen, bus transportation, or health insurance do not constitute supply under GST, especially when such facilities are provided as part of employment terms and not as a commercial activity.

Court's Interpretation and Reasoning:

The Applicant contended that the canteen and bus transportation facilities are provided as per contractual employment terms, are subsidized, and are not the Applicant's business activities. The Applicant argued that these services are provided by third-party vendors, with GST charged to the Applicant, who then recovers only a part from employees, with no profit motive.

The Applicant further argued that these activities are excluded from the scope of supply under Section 7(2)(a) read with Schedule III, as they are perquisites provided in the course of employment, and thus not taxable.

The Applicant relied on the principle that the term "business" should be confined to commercial activities and that providing support services to employees does not amount to carrying on business in those services.

The Authority, however, held that the supply of canteen and transportation services to employees is incidental or ancillary to the Applicant's principal business of manufacturing chocolates and confectionary products. The activities support the main business by ensuring employee welfare and operational efficiency.

Therefore, these services fall within the definition of "business" under Section 2(17). The Authority observed that the Applicant is supplying these services to employees for consideration (albeit subsidized), satisfying the elements of "supply" under Section 7(1).

It was noted that there are two distinct transactions: (i) third-party service providers supply canteen and transport services to the Applicant, who pays GST on these; and (ii) the Applicant supplies these services to employees and recovers part of the cost. The latter transaction is a supply liable to GST.

Key Evidence and Findings:

The Applicant's long-term wage settlement agreement explicitly provides for recoveries from employees for canteen and bus transportation facilities. Salary slips showed deductions for these services. Third-party service providers raised GST invoices to the Applicant. The Applicant did not own transport vehicles or hold contract carriage permits.

Application of Law to Facts:

The Authority applied the broad definition of "business" and "supply" under the CGST Act and concluded that the recoveries from employees constitute supply of services by the Applicant to its employees for consideration in the course or furtherance of business.

However, the Applicant's contention that these services are perquisites provided under contractual employment terms was acknowledged, but the Authority distinguished that only the concessional or free portion (perquisite) is outside GST, while recoveries made from employees are taxable.

Treatment of Competing Arguments:

The Applicant's reliance on precedents and Schedule III was considered but the Authority noted that Schedule III excludes services by an employee to employer, not employer to employee. The CBIC Circular clarifying perquisites were considered, but the Authority held that recoveries from employees are consideration and taxable.

The Applicant's argument that the bus transportation is exempt under Notification No. 12/2017-Central Tax (Rate) Sl. No. 15(b) was examined. The Authority found that the Applicant is not the contract carriage permit holder and the buses are rented from a third party. The service provided by the Applicant to employees is not covered by the exemption, which applies to non-air-conditioned contract carriages directly providing passenger transport services.

Issue 3: Applicability of exemption under Notification No. 12/2017-Central Tax (Rate) Sl. No. 15

The Applicant contended that bus transportation services provided via non-air-conditioned contract carriages are exempt under Sl. No. 15(b) of the Notification.

The Authority observed that the Applicant is not the holder of contract carriage permits and merely rents buses from a third party service provider. The third party charges GST on its invoices to the Applicant.

Since the Applicant is not providing contract carriage services directly to employees, but rather supplying transportation services as an employer, the exemption does not apply. The services provided by the Applicant fall under taxable passenger transportation services under SAC 9964, liable to GST.

Issue 4: Valuation of recoveries for GST purposes

The Applicant submitted that if GST is payable, it should be on the amount recovered from employees, not on the full cost charged by third-party service providers.

The Authority agreed that the taxable value for GST purposes is the actual amount recovered from employees. The balance amount borne by the Applicant is considered a perquisite and not taxable.

Issue 5: Taxability of notice pay recoveries from employees

The Applicant argued that notice pay recoveries are compensation for breach of employment contract and do not constitute supply under GST. They are penalties or deterrents and no service is provided in return.

The Authority referred to CBIC Circular No. 178/10/2022-GST dated 3 August 2022, clarifying that notice pay recoveries are not taxable as they are not consideration for any service but penalties for premature quitting.

Accordingly, notice pay recoveries are excluded from GST.

3. SIGNIFICANT HOLDINGS

The Authority held:

"The activity of providing canteen services and transportation services to employees is in connection with or incidental or ancillary to the principal business of the Applicant and constitutes 'business' under Section 2(17) of the CGST Act."

"There are two distinct supplies: (i) third-party service providers supply services to the Applicant, who pays GST; (ii) the Applicant supplies these services to employees for consideration (recoveries), which is a taxable supply under Section 7(1) of the CGST Act."

"Schedule III entry 1 excludes services by an employee to employer, not employer to employee. Perquisites provided free or concessional to employees under contractual terms are not taxable, but recoveries made from employees constitute consideration and are taxable."

"The exemption under Notification No. 12/2017-Central Tax (Rate) Sl. No. 15(b) for non-air-conditioned contract carriage does not apply to the Applicant as it is not the contract carriage permit holder and is not directly providing contract carriage services to employees."

"The value on which GST is payable is the actual amount recovered from employees, not the entire cost incurred by the Applicant."

"Notice pay recoveries made by the Applicant from employees for not serving notice period are not taxable under GST as they are penalties and not consideration for any supply."

Final determinations on each issue:

1. Recoveries from employees for canteen facilities are taxable under GST.

2. Recoveries from employees for bus transportation facilities are taxable under GST.

3. The Applicant is not entitled to exemption under Sl. No. 15 of Notification No. 12/2017-Central Tax (Rate) for bus transportation services.

4. GST is payable on the amount actually recovered from employees.

5. Notice pay recoveries are not taxable under GST.

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