2026 (4) TMI 134 - AAR - GST

GST on employee recoveries: subsidised canteen charges taxable, while notice pay recoveries are outside GST.

Amounts recovered from employees for subsidised canteen facilities were treated as consideration for the employer's outward supply made in the course or ... Levy of GST on recoveries made from the employees’ salary towards providing the canteen facility at subsidized rates in the factory - Employer-employee perquisites under Schedule III - non-fulfilment of the notice period. Canteen recoveries from employees - Incidental or ancillary business activity - Consideration for supply - HELD THAT: - The Authority held that providing canteen facility to employees, though not the applicant's principal activity, is an activity connected with and incidental or ancillary to its manufacturing business, since it supports the workforce engaged in the principal activity. The applicant pays the canteen contractor and thereafter recovers part of the cost from employees; there is no privity between the contractor and the employees. This results in two distinct supplies, one by the canteen contractor to the applicant and the other by the applicant to its employees. As the applicant recovers money from employees, the elements of business and consideration are satisfied, and the recovered portion is exigible to GST. [Paras 5] GST is payable on the amount recovered from employees towards canteen services. Employer-employee perquisites under Schedule III - Concessional canteen facility - HELD THAT: - As per Section 15(a)(iii), employer and employee are deemed to be related persons for the purposes of this Act. This means any transaction between employer and employee will not come out of ‘supply’ for the reason of not having consideration. However, respite to such transactions has come through Schedule 3. Section 7(2)(a) states that, notwithstanding anything in sub-section (1), activities or transactions specified in Schedule III shall be treated neither as a supply of goods nor a supply of services. Relying on the CBIC clarification, the Authority held that perquisites provided by an employer under the contractual arrangement with employees are not subjected to GST as a corollary to Entry 1 of Schedule III. However, that principle applies only to the portion representing the employer's concession or free facility. Where part of the canteen value is recovered from employees, that recovered portion is not a perquisite and remains taxable. Accordingly, the total canteen value was bifurcated into the recovered amount and the employer-borne perquisite portion, with only the latter kept outside tax. [Paras 5] The employer-borne concessional portion is not taxable as perquisite, but GST remains payable on the employees' recovery portion. The Authority followed the CBIC clarification that such recoveries are made as a deterrent or penalty on premature quitting of employment and not as consideration for tolerating an act or situation. Since the employee receives nothing in return against payment of notice pay, the recovery does not amount to consideration for a taxable supply. [Paras 5] Notice pay recoveries are not taxable under the GST Act. Final Conclusion: The Authority held that subsidised canteen facility supplied by the employer to employees amounts to a taxable supply to the extent of the amount recovered from employees, while the employer-borne concessional portion is treated as a non-taxable perquisite. Notice pay recovery for shortfall in notice period was held not liable to GST. Issues: (i) Whether GST is payable on recoveries made from employees' salary towards canteen facility provided at subsidised rates. (ii) Whether GST is payable on notice pay recoveries for non-fulfilment of the notice period.Issue (i): Whether GST is payable on recoveries made from employees' salary towards canteen facility provided at subsidised rates.Analysis: The canteen facility was held to be supplied by the employer to employees in the course or furtherance of business, as the activity was incidental or ancillary to the principal manufacturing activity and formed part of the employment arrangement. The Authority also treated the subsidised recovery from employees as consideration for that supply. The exclusion for services by an employee to an employer in Schedule III was held not to cover the employer's outward supply of canteen services, and the exemption for perquisites was limited to the concession portion, not the amount recovered from employees.Conclusion: GST is payable on the amount recovered from employees towards the canteen facility, and input tax credit is not available on that recovered amount.Issue (ii): Whether GST is payable on notice pay recoveries for non-fulfilment of the notice period.Analysis: The notice pay recovery was treated as a penalty or compensation for breach of the employment terms, not as consideration for any supply or for agreeing to tolerate an act. The Authority relied on the departmental circular clarifying that such recoveries are made to deter premature quitting and do not represent taxable consideration for a toleration service.Conclusion: GST is not payable on notice pay recoveries for non-fulfilment of the notice period.Final Conclusion: The ruling confirms taxability of employee recoveries towards subsidised canteen services, while excluding notice pay recoveries from GST.Ratio Decidendi: Amounts recovered from employees are taxable where they represent consideration for an employer's outward supply in the course or furtherance of business, but recoveries made as compensation or penalty for breach of employment terms do not amount to consideration for a taxable supply.