GST implications on provision of canteen facilities to employees by employer

Generally, the employers provide free or subsidised food facility to their employees in the factory or office premises. Such, food facility is nothing but a perquisite in terms of employment agreement. However under GST, the employer and employee relationship is that of a related person and as such any supply between them shall be liable for GST even where there is no consideration. Since inception of GST, the issue of taxability of perquisites to employees has remain debatable. The confusions got worsened after advance ruling of Kerala AR Authority in the case of M/s Caltech Polymers which ruled that food supply to employees against recoveries made from them shall be liable for GST. In this article, an effort has been made to throw light on each and every aspect of this issue in terms of legal provisions of GST Act and Advance Ruling.

Free tea/coffee/food provided to all the employees in office premises under terms of employment contract shall not be subject to GST (clarified by Press release dated 10-07-2017). The employer will not be able to take ITC attributable to inputs used in providing such facility to employees due to restriction placed by Section-17(5)(b) of the CGST Act, 2017 (subject to exception as below).

However, the employer will be eligible to take ITC in respect of such inputs where it is obligatory for the employer to provide the same to its employees under any law for the time being in force [Inserted vide CGST (Amendment) Act, 2018 w.e.f. 01-02-2019]. For example, in a canteen in factories employing more than 250 workmen, canteen is a statutory requirement. As per section 46 of the Factories Act, if 250 or more workers are employed, provision of canteen facility is mandatory. In such cases, ITC shall be available in the case where payment is made to the contractor for hiring food services (catering services) for employees and also in case where payment is made for food preparation and resources used in the factory premises itself.

Further, where food services are provided by the employer and a partial or full recovery is made from the employees in respect thereof, such recovery shall be treated as “supply” attracting GST.
In this respect, there is a recent Advance Ruling of The Kerala Advance Ruling Authority in the case of M/s Caltech Polymers Private Limited- 2018-TIOL-01-AAR-GST where it has been held that the supply of food items to the employees for consideration in the canteen run by the appellant company would come under the definition of ‘supply’ and would be taxable under GST. However, the Advance Ruling is silent as regards valuation aspect of such supply, which will discuss later in this article.

KERALA AAR:- M/s Caltech Polymers Private Limited

Order No. CT/531/18-C3 Dated 26/03/2018

M/s Caltech Polymers Private Limited, Mallapuram is a private limited company engaged in the manufacture and sale of footwear. It submitted that they are providing canteen services exclusively for their employees. They are incurring the canteen running expenses and are recovering the same from its employees without any profit margin.
The applicant further submitted that the service provided to the employee is not carried out as a business activity. It is according to the provisions of the Factories Act, 1948. As per section-46 of the said Act, any factory employing 250 or more workers is required to provide canteen facility to its employees.
The applicant detailed the work as follows:-
(a) The space for canteen is provided by the company, inside the factory premises.
(b) The cook is employed by the company and is paid monthly salary.
(c) The vegetables and other items required for preparing the food items are purchased by the company directly from the suppliers.
(d) The number of times, the canteen facility is availed, each day, by the employees is tracked on a daily basis.
(e) Based on the details above, the expenditure incurred by the company on the vegetables and other items required for preparation of food is recovered from the employees, as a deduction from their monthly salary.
The company does not make any profit while recovering the cost of the food from the employees. Only the actual cost incurred for the food items is recovered from the employees.
The company is of the opinion that this activity does not fall within the scope of ‘supply’, as the same is not in the course or furtherance of its business. The company is only facilitating the supply of food to the employees, which is a statutory requirement and is recovering only the actual expenditure incurred in connection with the food supply, without making any profit.

Observation of Authority:-

The term “business” is defined in section 2(17) of CGST Act which reads like this:- “Business” includes:- (a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for pecuniary benefit; (b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a)…. From the plain reading of the definition of “business”, it can be safely concluded that the supply of food by the applicant to its employees would definitely come under clause (b) of section 2(17) as a transaction incidental or ancillary to the main business.

Schedule- II of CGST Act describes the activities to be treated as supply of goods or supply of services. As per clause-6 of the Schedule, the following composite supply is declared as supply of service:- “Supply by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply of service is for cash, deferred payment or other valuable consideration.” Even though there is no profit as claimed by the applicant on the supply of food to its employees, there is “supply” as provided in section 7(1)(a) of the CGST Act, 2017. The applicant would definitely come under the definition of “supplier” as in section 2(105) the CGST Act.

The term ‘consideration’ is defined u/s 2(31) of CGST Act as below:- ‘consideration’ in relation to the supply of goods or services or both includes- a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; b)the monetary value of any act or forbearance, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central or State Government
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.

Since, the applicant recovers the cost of food from its employees, there is a consideration as defined in Section 2(31) of the Act.

In the light of the aforesaid circumstances, we rule as under:-
It is hereby clarified that recovery of food expenses from the employees for the canteen services provided by company would come under the definition of ‘outward supply’ as defined in Section 2(83) of the Act and therefore taxable as a supply.

The above ruling in the case of Caltech Polymers to the effect that GST is payable on the amount recovered from the employees for canteen facility by the employer has led to lot of confusions. In view of the above AR order, not only the food expenses but even other employee benefits may need to be evaluated to determine the taxability, by looking at the employment arrangement, contract, consideration charged etc. But there is one more aspect of this ruling that this ruling is binding only upon the applicant and the jurisdictional tax authority. Therefore, it is opined that the Government should come out with a proper clarification in this regard so that the confusion revolving around be settled.

Some issues which need to be answered owing to above ruling are as follows. We have tried to go in depth of legal provisions related thereto:

What shall be the rate of GST chargeable on supply of food made to employees either cooked in factory premises or cooked food supplied by outside contractors providing catering services?

Answer:-
Notification No. 11/2017 – Central Tax (Rate) dated 28-06-2017 (as amended by Notification No. 46/2017 dated 14-11-2017) prescribes following GST rates in respect of supply of food services as given below:-

Nature of supply of goods or services

GST Rate as applicable

Heading 9963:- Accommodation, food and Beverage services:

(i) Supply of food or any other article for human consumption or drink, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or other article is supplied (other than located in the premises of hotels, guest house, clubs etc. having declared tariff of accommodation of Rs. 7500 or more per day)

5% (2.5% CGST + 2.5% SGST) and ITC on goods and services used in such supply shall not be allowed.

Heading 9963:- Accommodation, food and Beverage services:

(v) Supply of goods, being food or any other article for human consumption or any drink (whether or not alcoholic liquor for human consumption) as a part of outdoor catering.

18% (9% CGST + 9% SGST) and ITC shall be allowed to be taken for inputs used in making such supply.

Thus, the issue arises as to what should be the rate of GST where the employer gets food prepared in the canteen located in the factory premises itself or food supplied by contractor cooking food outside any making supply directly to factory. In the case of M/s Merit Hospitality Services Pvt. Ltd., the AAR held that in case of cooking outside, the transaction is in the nature of outdoor catering and 18% GST would apply. But in our view, in the both cases the rate of GST should be at 5%. This view is further strengthened by Notification No. 13/2018 Central Tax (Rate) dated 26-07-2018 which provides as under:-

For item (i) in as above, the following shall be substituted, namely:-

Supply of food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess, canteen, for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied (other than located in hotels, inns, guest houses, clubs etc. having declared tariff of Rs. 7500 or more per day.

Explanation-1:- This item includes such supply at a canteen, mess, cafeteria or dining space of an institution such as school, college, hospital, industrial unit, office, by such institution or by any other person based on a contractual arrangement with such institution for such supply, provided that such supply is not event based or occasional.

5% (2.5% CGST + 2.5% SGST) and ITC on goods and services used in such supply shall not be allowed.

If based on Caltech Polymers AR, the employer decides to pay GST on the recoveries made from employees, how the valuation of such supply shall be made for calculating GST liability?

Answer:-
The advance ruling in respect of Caltech Polymers is silent with regard to valuation aspect of food supplies made by the employer to employee at concessional rates.

Generally, the GST is chargeable on the consideration recoverable from the buyer against supply of goods or services. But in this case, the employer is making supply of food to employees at subsidized rates which might be even below the actual cost of such food. Further, it is to be noted that for the purpose of GST, the employer and employee are treated as ‘related person’ by virtue of Section 15 of CGST Act, 2017. In case of related parties, the transaction value shall be determined according to Rule-28 of CGST Rules, 2017 which is reproduced as below:-

“Rule-28: Value of Supply of goods or services or both between distinct or related persons, other than through an agent:- The value of supply of goods or services or both between distinct or related persons as specified in sub-section (4) or (5) of section-25 or where the supplier and recipient are related, other than where the supply is made through agent, shall-

Be the open market value of such supply;
If the open market value is not available, be the value of supply of goods or services of like kind and quality;
If the value is not determinable under clause (a) or (b), be the value as determined by application of rule 30 or rule 31, in that order:

Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to 90% of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person.

Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of goods or services.

Analysis:-

If clause (a) of Rule-28 is followed, Open Market Value shall be considered as the transaction value. In case of supply of food to employees to employer, it will not be possible to get open market value unless the employer offers such food items in canteen for sale to unrelated persons (contract labour, visitors). In such case, price at which food items are sold to unrelated persons will be considered for the purpose of valuation of food supply to employees.
However, where the employer does not offer food services to unrelated persons from the canteen, clause (a) or (b) of Rule-28 shall not apply and therefore clause (c) shall be applied. Accordingly, valuation shall be based on the principles prescribed in Rule 30 or 31 in that order

Rule-30 states that the value shall be 110% of the cost of production or manufacture or the cost of acquisition of such goods or services.

In view of the above discussion, following situations may prevail which needs to be decided based on cost benefit analysis:-

Provide free food (canteen) facility to employees and no ITC (as requirements of Factory Act not applicable)
Provide free food (canteen) facility to employees and ITC available @ 5% (since 250 or more workers, requirement of Factory Act applicable)
Don’t pay GST and provide food (canteen) facility to employees against recovery from them and wait for future clarity in law (as AAR of Caltech Polymers is applicable only to the applicant)
Pay GST @ 5% by adopting sale price of food to other non related parties (clause-a of Rule-28), for supply to employees made against recovery from them- No ITC can be claimed.
Pay GST @ 5% by adopting value equal to 110% of purchase price of food, for supply to employees made against recovery from them- No ITC can be claimed.

What will be the value adopted for the purpose of GST, in respect of food item sold to contract labourers working in the factory?
The contract labourers are not the employees of the employer and hence they are not related persons. Hence, GST in their case shall be payable on price charged from such contract labourers. GST shall be charged @ 5% without ITC benefit.

GST applicable on amount recovered from employees for third party canteen services

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