07-Sep-2018 Guide to GST Impact on Indoor Canteen Services

Facts of the Case:-

Company arranges catering/ canteen services for serving food at subsidized rates/ free of costs for its employees. The amount is recovered from the employees through payroll deduction and payment is made directly by the Company to the Caterer

Issue:-

What is the taxability for the canteen services provided by the employer to the employees under GST

Comments:-

1.Whether the canteen services provided by the employer free of cost / at concessional price to employee be treated as a ‘supply’? Quote:-

*7(1) For the purposes of this Act, the expression “supply” includes–– (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

Unquote:-

• As per the aforesaid definition, we understand that the supply should be in the course or furtherance of business. Hence, to analyse whether the canteen services provided are to be treated as a supply, it is important to analyse the definition of term business Can we say that the canteen services provided by the employer is in the course of business? Quote:-

2(17) “business” includes–– (a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

Unquote:-

• From the aforesaid reading of the definition of business, it appears that the supply of canteen facility by employer to employee may be considered as a transaction incidental or ancillary to the main business

3.Can we say that the said services is not in relation to business since the said facility is provided as per the statutory requirement in the Factories Act, 1948?

• It appears that the canteen service provided by employer to employee qualifies as a supply as per Section 7 of the Central Goods and Services Tax Act (‘CGST Act, 2017’)

4.If the same is provided free of cost i.e without consideration to the employees, will it still qualify as a supply?

• In order to analyse the same, we will refer Schedule I of the Act which states the activities to be treated as a supply even if it is without consideration Quote:-

• Schedule I – Activities to be treated as a supply even if made without consideration

“2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business”

Unquote:-

• Supply of goods or services or both without consideration between the related persons will be treated as a supply. We will now analyse the definition of the term related person

5.Are employer and employee related person under GST?

Quote:-

Explanation to Section 15(a) - persons shall be deemed to be “related persons” if–– …….. …..
(iii) such persons are employer and employee;

(iv)

Unquote:-

• Yes, as per the aforesaid section, employer and employee are to be treated as a related person. Hence, even if the services are provided free of cost, the same will be treated as a supply as per Schedule I of the CGST Act, 2017

6.The canteen services are provided to the employees at a concessional price and the amount is recovered from the employees through payroll deduction and payment is made directly by the Company. Will the same qualify as a supply?

• As per the above analysis, canteen services provided to the employees at a concessional price may qualify as a supply.

7.On what value should the employer discharge GST?

Quote:-

• We refer to Rule 28 of CGST Rules, 2017 which inter alia states the value of supply of goods or services between related persons:-

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

(a) be the open market value of such supply;

………

Unquote:-

• As per the aforesaid provisions, it appears that the employer may have to discharge GST on the open market value e. the value charged by the caterer to the employer may be taken as a open market value in cases where the employer is not providing such services to non related parties.

8.Can we say that the value declared in the invoice will be deemed to be the open market value?

Quote:-

• We refer to Provision to Rule 28 of the CGST Rules, 2017

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 the goods or services.

Unquote:-

• The value declared in the invoice will be deemed to be the open market value provided the recipient is eligible for full input tax credit. In the instant case, since the employees are not registered under GST, they will not be eligible to claim input tax credit. Accordingly, the aforesaid proviso will not be applicable to them.

9.What should be the GST rate levied by the employer?

• With reference to Notification 11/2017 dated 28 June 2017 (as amended from time to time), the employer shall levy GST at 5% provided the employer will not take the credit of input tax credit charged on the goods and services used for supplying the said service. In case the employer wants to avail the input tax credit charged on the goods and services, GST at 18% will be levied.

10.Is employer required to raise Tax invoice to the employee?

• Yes the employer may issue tax invoice or bill of supply, as the case may be, levying GST at the appropriate rates

11.Will the employer get the input tax credit for the catering service provided by the caterer to the employer?

We refer to Section 17 of the CGST Act, 2017 which inter alia states the services for which input tax credit is not available

Quote:-

• 17(5)(b)(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

Unquote:-

• As per the aforesaid Section, the employer will be allowed for input tax credit provided the employer discharges GST on outward supply to the employees at the open market value. Otherwise the same would be treated as a cost.

12.In case the employer does not discharge GST on the outward supply to employees, will the employer get the credit of input tax credit if the canteen services are obligatory for an employer to provide to its employees as per any law (Eg. The Factories Act)?

• Even though the canteen services are obligatory for an employer to provide to its employees as per The Factories Act or any other law, the employer will be allowed for input tax credit only if he discharges GST on outward supply to the employees at the open market value.

• However, as per the proposed amendments in the input tax credit provisions of GST Act, a registered person will be allowed input tax credit in respect of goods or services or both in case provided the same is obligatory for an employer to provide to its employees under any law for the time being in force.

Conclusion:-

One may also take a view that the canteen services provided by employer forms part of the employment contract and accordingly not liable for GST. Please note that the aforesaid blog is for educational purposes only and the GST authorities may take a different view and the same is prone to litigation.

Please feel free to write to us on jill@apmh.in/info@apmh.in for any further queries on the above blog.