GST ON CANTEEN SERVICES FOR EMPLOYEES

[Dr. Sanjiv Agarwal]

When it comes to taxability of supply of food items / beverages to employees by employer for a consideration from / in a canteen run by the employer, under the GST law, it would be considered as a supply and liable to levy of GST.

However, in the pre-GST period, vide S.No. 19 and 19A of exemption Notification No. 25/2012 ST dated 20.60.2012 as amended by Notification No. 14/2013-Service Tax dated 22.10.2013, the 'services provided in relation to serving of food or beverages by a canteen maintained in a factory covered under the Factories Act, 1948 (63 of 1948), including a canteen having the facility of air-conditioning or central air-heating at any time during the year' were exempted from service tax.

It may be noted that while services provided by employees are exempt supplies, supply of services provided by the employer to employees shall be liable to GST.

Advance Ruling

In Re: Caltech Polymers Pvt. Ltd. 2018 (4) TMI 582 - AUTHORITY FOR ADVANCE RULING - KERALA ; , the assessee preferred in application for Advance Ruling for taxability of recovery of food expenses from employees for the canteen services provided by it. It submitted that they were providing canteen services exclusively for their employees. All the canteen expenses were recovered from its employees without any profit margin. It further contended that such service was not being carried out as a business activity.

According to factual matrix, the service provided to the employee was not being carried out as a business activity but it was according to the provisions of the Factories Act, 1948.  Accordingly, as per section 46, any factory employing more than 250 workers is required to provide canteen facility to its employees. The detailed work involved the following activities as follows:-

1. The space for the canteen is provided by the Company, inside the factory premises.
2. The cook is employed by the Company and is paid monthly salary.
3. The vegetables and other items required for preparing the food items are purchased by the Company directly from the suppliers.
4. The number of times, the Canteen facility is availed, each day, by the employees is tracked on a daily basis.
5. 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, in proportion to the foods consumed by them.
6. The company does not make any profit while recovering the cost of the food items, from the employees. Only the actual cost incurred for the food items is recovered from the employees.

It was company’s belief that such activity does not fall within the scope of 'supply', as the same is not in the course or furtherance of its business. The company was only facilitating the supply of food to the employees, which was a statutory requirement, and was recovering only the actual expenditure incurred in connection with the food supply, without making any profit.

The ruling was sought on whether reimbursement of food expenses from employees for the canteen provided by company comes under the definition of outward supplies as taxable under GST Act ?

The AAR took note of definitions of ‘business’ in section 2(17) of the CGST Act, 2017, i.e.,

‘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);…

and observed 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 to the GST 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 or service is for cash, deferred payment or other valuable consideration. "

The AAR observed that 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 GST Act, 2017. The applicant would definitely come under the definition of ‘Supplier’ as provided in sub-section (105) of Section 2 of the GST Act, 2017.

Further, since the applicant recovers the cost of food from its employees, there is consideration as defined in Section 2(31) of the GST Act, 2017.

The Authority for Advance Ruling (AAR) ruled that the recovery of food expenses from the employees for the canteen services provided by company would come under the definition of ‘outward supply’. Therefore, it would be taxable as a supply of service under GST.

Appellate Advance Ruling

Aggrieved by the Advance Ruling, an appeal was preferred before the AAAR. It was contended that if an activity is not in the course or in furtherance of one's business, it does not constitute supply unless it is an import of service as mentioned under Section 7(1) of the CGST Act, 2017.  Further, supply of subsidized food was not its business and that it would not constitute a ‘supply’ u/s 7 of the CGST Act, 2017. As per the requirement of Factories Act, 1948 for an industry having more than 250 employees, canteen facility shall be provided. To comply with the statutory requirements, the company provided food to the employees and cash is recovered from their salary. The authority below classified it as supply in furtherance of business. The Telengana High Court had delivered a judgement in favour of M/s. Bhimas case [Bhimas Hotel Pvt. Ltd.  v. Union of India 2017 (4) TMI 860 - ANDHRA PRADESH HIGH COURT stating that subsidized food to employees and realization of cost of wages is an industrial obligation it does not amount to service. Government of India issued a press release on 10-07-2017, stating that supply by employer to employee is in the course of furtherance of employment and not in the course of furtherance of business and comes under Schedule III, which is not liable to tax.

The AAAR observed that crucial issues involved are that of ‘consideration’ and ‘supply’. It held that inspite of the absence of any profit, the activity of supplying food and charging price for the same from the employees would surely come within the definition of ‘supply’ as provided in Section 7(1)(a) of the GST Act, 2017. Consequently, the appellant would definitely come under the definition of ‘supplier’ as provided in sub-section (105) of Section 2 of the GST Act, 2017. Moreover, since the appellant was recovering the cost of food items from their employees, there was ‘consideration’ as defined in Section 2(31) of the GST Act, 2017.

The reliance in Bhima’s case of Telangana High Court (supra) was also ill founded as it pertained to Service Tax and VAT. The court in this case had held that once the State Authorities have treated the supply of food to the workers of the petitioner as sale, it is not open to the Revenue to treat the same as service and impose a liability.

The food provided to the employees was already taxed under the erstwhile Value Added Tax and thereby the Hon'ble High Court held that the same could not be subjected to Service Tax. Hence the Court had decided upon a matter where the issue of double taxation was a relevant fact. As there is no possibility of such double taxation in the GST regime, it is evident that the facts of the Bhimas Hotels case (supra) cannot be considered to be in pari-materia with the facts of this case.

In conclusion, the appeal was dismissed and advance ruling confirmed. 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. [In Re: Caltech Polymers Pvt. Ltd.  2018 (10) TMI 1313 - AUTHORITY FOR ADVANCE RULING, KERALA ].