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Treading GST Path XLIII - Advance Ruling on Canteens - The Pandora's (tiffin)box

 

APRIL 12, 2018

By G Natarajan, Advocate, Swamy Associates

THE decision of the GST Advance Ruling Authority, Kerala [Caltech Polymers Pvt. Ltd. - 2018-TIOL-01-AAR-GST, to the effect that the cost recovered from employees, by the employer, towards using the canteen facility provided by the employer is a "supply" and hence liable to GST, has kicked up large scale debates throughout the country. It is seen that some of the vital arguments, which could have been advanced before the Authority, seems to have been not advanced.

It may be noted that as per the provisions of various enactments such as, the Factories Act, the employer is bound to provide canteen facility to the employees. While some of the employers provide free food, by and large subsidised food is being provided to the employees in such canteens. Provision of such facility, either free food or subsidised food is in the form of perquisites in the hands of the employee, for the services provided by the employee to the employer. It cannot be treated as an independent supply by the employer to the employee.

Reference is also invited to the Press Note dated 16 July 2017 issued by the Government, containing the following clarification, which signifies the intention of the Government.

Another issue is the taxation of perquisites. It is pertinent to point out here that the services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods or supply of services). It follows therefrom that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST.

As per S.No.1 of Schedule III of the CGST Act, 2017, services provided by the employees to the employer are not considered as supply and hence, the subsidised food provided by the employer to the employee, by way of consideration for the services provided by the employee, cannot be subjected to GST levy.

The decision of the Advance Ruling Authority would give rise to the following issues.

It may be noted that employers and employees are treated as related persons, as per Section 15 (5) of the CGST Act, 2017. As per S.No. 2 of Schedule I of the Act, supply of goods are services between related persons, made even without consideration would be a supply. So, even if the employer provides free food to its employees, as per S.No.2 of the Schedule I of the Act, it may be considered as a supply. Since the parties are related, valuation in such case, be it free supply or subsidised supply, shall be determined as per Rule 28 of the CGST Rules, 2017, i.e. based on "open market value" or by any other method prescribed in Rules 28 to 31 ibid. All this would lead to unimaginable consequences.

It is strongly felt, with due respect, that the impugned decision of the Advance Ruling Authority is duly appealed against. Or, in order to put at rest the controversies, the Government may clarify the issue in more clear terms.

(The views expressed are strictly personal.)

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

 


 RECENT DISCUSSION(S) POST YOUR COMMENTS
   
 
Sub: Whether its supply at all is the question

Hi Natarajan,

Schedule III of CGST Act states that services provided by an employee to employer are neither supply of goods nor services. In other words the legislative intent was to keep the services of an employee under an employment contract out of the purview of GST. Now if the employee, as a part of his employment contract receives certain statutory or obligatory benefits like subsidized food in terms of Factories Act, insurance coverage in terms of ESI Act, conveyance (IT/ITES sector companies are required to provide conveyance at night and most of the companies owing to their distance from the cities or towns provide conveyance to their employees), the cost of such benefits extended by the employer to the employee (if any subsidy is borne by the employer) is regarded as cost to company.

The services per se, i.e. subsidized canteen, insurance, conveyance are actually provided by third parties arranged by the employer (rarely by employer himself and even if its by employer it does not alter anything) and the costs incurred are recovered from the employees by the employer, usually through salary deductions and consolidated amounts are paid to the third party service providers. These recoveries will be accounted by the employer and adjusted against the expenditure incurred by the employer for payments made to the service providers.

The entire arrangement is part of the employment contract and as stated above any additional expenditure borne by the employer will be regarded as cost to the company by the employer. Where is the question of this being regarded as supply as envisaged under section 7 read with respective Schedules. It was naïve on the part of AAR to not consider or comprehend how employment contracts work or was there deficiency in the arguments put forth by the party's representative, and the result was a disaster creating unwarranted panic throughout the country. Government should also keep all such perks, benefits etc. provided by employers to employees out of the purview of GST and revise the law accordingly. Its shocking to say the least that government and tax authorities is looking for revenues treating these activities as supplies.

Last but not the least, a piece of advise to the Govt. AAR as an institution in GST needs a thorough revamp. Two Joint Commissioners deciding the fate of an activity, assessee and the country is plain stupid. And imagine AARs in each of the States. Let there be a Principal Bench at Delhi and regional benches in different zones - north, east, west, south and central. Each of these regional benches to be headed by a HC judge and the Principal Bench by a SC judge. It should not be manned by junior officers of the tax department - its a joke. Hope the Finance Ministry, CBIT will wake up and smell the coffee.

Regards,
Santosh Hatwar
Tax Lawyer

Posted by santosh hatwar