GST on canteen subsidies: Section 7 exempts employees, but makes recoveries from contractual workers a taxable supply

AAR (Gujarat) held that subsidized recoveries from direct employees towards canteen facilities do not constitute "supply" under Section 7 of the CGST/GGST Acts and are therefore not liable to GST. However, subsidized recoveries from contractual workers for the same canteen facilities amount to a taxable supply by the applicant to such workers. The ruling follows the earlier decision in Troikaa Pharmaceuticals, finding no employer-employee relationship between the applicant and contractual workers, as all statutory dues and control rest with the contractor. Consequently, GST is payable on the amounts deducted from payments to the workers' contractor, and not merely on open market value.

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Issues: (i) Whether subsidized deductions recovered from employees for canteen facilities operated by a third-party canteen service provider constitute a 'supply' by the applicant under Section 7 of the CGST Act, 2017 and corresponding provisions of the GGST Act, 2017; (ii) Whether subsidized deductions recovered from contractual workers for such canteen facilities constitute a 'supply' by the applicant under Section 7 of the CGST Act, 2017 and corresponding provisions of the GGST Act, 2017; and if so, whether GST is payable on the amount recovered from contractual workers or on the open market value charged by the canteen service provider.

Issue (i): Whether the subsidized deduction recovered from employees for canteen facilities is a 'supply' by the applicant under Section 7 of the CGST Act, 2017 and GGST Act, 2017.

Analysis: The facility is provided pursuant to a statutory obligation under Section 46 of the Factories Act, 1948 and in terms of employment arrangements between employer and employee. Schedule III to the CGST Act excludes services by an employee to the employer in the course of or in relation to employment and CBIC Circular No. 172/04/2022-GST clarifies that perquisites provided by the employer to employees in terms of contractual agreement entered into between them are not subject to GST. The element of enforceable reciprocity and quid pro quo necessary for a 'supply' under Section 7 is absent where the provision forms part of the employment arrangement and the recovery represents the employee's share of a perquisite provided in relation to employment.

Conclusion: Subsidized deductions recovered from employees for canteen facilities do not constitute a 'supply' by the applicant under Section 7 of the CGST Act, 2017 and GGST Act, 2017; GST is not leviable on such amounts.

Issue (ii): Whether the subsidized deduction recovered from contractual workers for canteen facilities is a 'supply' by the applicant under Section 7 of the CGST Act, 2017 and GGST Act, 2017; and whether GST is payable on the amount recovered from contractual workers or on open market value.

Analysis: Contractual workers are engaged through a contractor and the contractual terms demonstrate that the contractor retains responsibility for wages, statutory contributions and other employment obligations; the applicant deals with the contractor and does not exercise the requisite employer control to treat contractual workers as employees for the purposes of Schedule III. Transactions of supplying food are captured as services in Schedule II (clause 6) when provided for consideration. The amounts recovered from contractual workers constitute consideration as defined in Section 2(31) and the activity of supplying subsidized food to contractual workers is incidental or ancillary to the applicant's business under Section 2(17). Prior rulings on identical facts support treating recovery from contractual workers as outward supply under Section 2(83).

Conclusion: Subsidized deductions recovered from contractual workers for canteen facilities constitute a 'supply' by the applicant under Section 7 of the CGST Act, 2017 and GGST Act, 2017; GST is leviable on the amount recovered from the payment to the workers' contractor (i.e., the amount actually recovered from contractual workers), rather than treating the applicant's incidence based on the open market value charged by the canteen service provider.

Final Conclusion: The advance ruling holds that the applicant is not liable to GST on amounts recovered from employees for canteen services (in favour of the assessee on that issue), but is liable to GST on amounts recovered from contractual workers for the same services (in favour of the revenue on that issue); GST on contractual workers' portion is payable on the amount recovered from the payment to the workers' contractor.

Ratio Decidendi: Amounts recovered from employees as part of employment-related perquisites governed by employment contracts and Schedule III are not a 'supply' under Section 7, whereas amounts recovered from contractual workers engaged through a contractorwhere the principal lacks employer controlconstitute consideration for a supply and are taxable as outward supply under Sections 2(83) and 7 of the CGST Act, 2017.

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