Providing meals to office staff for a price would be liable to goods and services tax going by a decision of the Authority for Advance Rulings, a quasi-judicial body that helps taxpayers find out potential tax liabilities in advance.
“Recovery of food expenses from the employees for canteen services provided by company would come under the definition of ‘outward supply’ as defined in the Section 2(83) of the Act, 2017, and therefore, taxable as a supply of service under GST,” the authority ruled recently on a plea filed by Caltech Polymers, a Kerala-based footwear manufacturer.
Tax experts say the move could enhance compliance burden of companies. The authority’s rulings are case specific, but have persuasive value.
A number of companies provide meal services to employees and a monthly charge is deducted from their salary towards this. This issue had cropped up in the previous regime of service tax and the government subsequently exempted this service.
Exemptions were brought down under GST, which replaced multiple state and central taxes such as sales tax, value added tax, entry tax, central excise duty, service tax, and countervailing duty with effect from July 1, 2017.
Caltech Polymers had recently approached AAR to seek clarity on its tax liability in case of charge deducted from employees in lieu of canteen running expenses at no profit. The company had submitted that the canteen facility was not carried out as a business activity. The authority observed that even though there was no profit as claimed by the applicant, there was supply as defined under the Act.
Supply, by way of or as part of any service or in another 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 authority quoted from clause 6 of Schedule II of the GST Act.
The decision could have wider ramifications as many businesses recover expenses towards canteen food from its employees, which is often subsidised. “It is also not clear whether in such cases, GST rate would be 5% (as canteen) without input credit or 18% as outdoor caterer," said Pratik Jain, indirect tax leader at PwC.
“Further, since the employer and employees are considered as 'related parties', it could lead to valuation disputes. The government should perhaps consider providing an exemption from GST in such cases," he said.
Bipin Sapra, partner at EY, said AAR’s ruling sets a precedence where all employer-to-employee supplies may be held taxable and hence increasing the cost of doing business for companies in India.
“Since each meal in this case is a supply, this also increases the compliance for corporates substantially," he said.
M S Mani, partner at Deloitte India, said, “The extremely broad definition of the term consideration together with the fact that any supply is covered leads to situations where non-business activities also attract GST. Some of these B2C situations could also lead to a credit loss. Hence it is essential that all such activities are closely evaluated in advance.”