Introduction

The introduction of Goods & Service Tax (in short GST) nation vide w.e.f. 1 1^st July 2017 subsuming various laws have been laid to a major extent on the erstwhile Service Tax law. Amongst others, the issue regarding the taxability of ‘Canteen Facility’ or

its classification is a matter of concern under the GST regime. Further, Input Tax Credit (in short ITC) admissibility of the same is also in question.

The provisions of Factories Act, 1948, provide that any factory which employee’s more than 250 workers are require to provide canteen facility to its employees. Future it is very common to provide ‘Canteen Facility’s to

its employees which may be due to legal obligations or otherwise say to maintain equality or internal compliance norms. Such facilities are extende to employees on Free of Cost/ Concessional or on fully chargeable basis.

Chargeability

At the outset, taxability of ‘Canteen Facility’ under the GST need to be determine which can be analysed through the Charging section of the statue i.e. Section 9 of the Central Goods and Service Tax Act 2017(“CGST Act 2017”) read with Section 7 of the CGST Act 2017 i.e. scope of supply. As per Section 7(1) (a) of CGST Act, 2017 sale, transfer, barter exchange etc. all are cover under the definition of supply if it for business purpose and involving consideration. Thus it is very clear that if the employer provide ‘Canteen Facility’s to its employees for a consideration

which may be at concessional rate or otherwise the same will be covered

under Section 7(1) (a) and such services shall be treat as supply.

The same was ruled out by Appellate Authority of Advance Ruling-Kerala [2018] 92 taxmann.com 142/67 GST 95 (“AAR”), wherein, M/s. Caltech Polymers Pvt. Ltd (the applicant), engaged in the manufacture and sale of footwear, also provides canteen service exclusively to its employees. The said service is provide to comply with the provisions of Factories Act, 1948, wherein Further, all the canteen expenses are incurre by the company and recover from employees without any profit margin. The company approached the AAR to seek advance ruling on whether recovery of food

expenses from employees for canteen services would come under

the definition of outward supplies and attract the GST.

The company was of the opinion that such activity would be outside the purview of ‘Supply” as such activity was not in the course or furtherance of its business. Further, such facility of supplying food to the employees was done as part of their statutory requirement and the expenses recover in connection with the food supply were without any profit. A Mega Exemption Notification No.[1] 25/2012 dated 20.06.2012 issued by the Government of India was referre by the company. As per the notification services in relation to the supply of food or

beverages by a canteen maintained in a factory covered under

the Factories Act, 1948 was exempt under the Service Tax Law.

AAR observes, while it is true that in the pre-GST period, such service by canteen maintaine in factory cover under Factories Act was exempte from service tax, there is no similar provision under the GST laws; On a plain reading of definition of “Business” u/s 2(17) of CGST Act, it can safely be conclude that supply of food by applicant to its employees would definitely fall under clause (b) as a transaction incidental or ancillary to main business, rules AAR. Holds that, even though there is no profit as claimed by the applicant on supply of food, there is “supply”

as contemplated u/s 7(1)(a) of CGST Act and the applicant would come

under the definition of “Supplier” as provided in Section 2(105); Moreover, since the applicant recovers the cost of food from its employees, there is consideration

as defined in Section 2(31) of CGST Act.

The AAR, therefore, ruled –

“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, 2017, and therefore, taxable as a supply of service under GST”.

Herein, it can be inferred that, if such services are cover by employment contract and forms part of cost to company

then they are not to be consider as supply. However if they are not part of Cost to Company

then such services will be treat as supply and Entry no 1 of Schedule-III will not apply.

Valuation

Once the activity is cover by the definition of Supply, the value on tax shall be levie shall be assess, So as per Section 15(1) of CGST Act, 2017 which states that the taxable value of a supply of goods or services shall be the transaction value, where supplier and recipient are not relate. Further as per entry (iii) of explanation (a) to Section 15 related person includes employer-employee relationship. Since the employer-employee relationship is cover in the relate person’s ambit, hence transaction value i.e. concessional value for supply or supply made without consideration

(if not in course of employment) cannot be adopt and

valuation has to be made in accordance with Rules prescribe in this regards.

Rule 28 of CGST Rules 2017

Now as per Rule 28 of CGST Rules 2017, which deals with valuation of supply of goods or services or both between distinct or related persons, other than through an agent, which by virtue states that the value of such supply shall be open market value and

if open market value not available then the value of services of like kind or quality. If still it cannot be determine then Rule 30, Rule 31 shall be refer in order. Now in the normal course of business except for some exceptional circumstances, the open market value shall be available

so the organization should value accordingly.

Availability of input tax credit

Now analyzing the ITC admissibility for the ‘Canteen Facility’ need to be done as it is the most concerning issue of this service for the industry. Section 16 of CGST Act, 2017 allows ITC for tax charged on any supply of goods or

services if use or intend to be use in the course or

furtherance of his business which is subject to conditions laid in Section 16(2) of the CGST Act 2017.

Further Section 17(5) of CGST Act, 2017 talks about blockage of the ITC in certain situations wherein clause (b) of Section 17(5) deals with blockage of ITC on food and beverage whether supplied as goods or service or both. Further, a provision to this clause was insert w.e.f. 01.02.2019, wherein input tax credit in respect of foods & beverage shall be available, where

it is obligatory on part of the employer to provide to its employees under any law for the time being in force. For instance, under the Factories Act, units crossing a certain number of workers need to mandatory provide

‘Canteen Facilities’ to its employees. So in this case ITC shall be admissible.

Conclusion

In nutshell, it can be said that the changeability of tax on ‘Canteen Facility’ depends on the employee-employer relationship and consideration involve therein. Further ITC admissibility is completely based on one factor

i.e. whether or not any obligation is there for the time being under any law, if the answer is affirmative

then ITC shall be allow otherwise blockage is create by virtue of Section 17(5) of CGST Act 2017. Thus it must be analyze case to case basis and no thumb rule can be made. Although the very motive of GST

i.e. free flow of credit is somehow not achieved due to this restriction on ITC.

[1] http://www.cbec.gov.in/resources//htdocs-servicetax/mega-exemption-notfn.pdf