Input Tax credit eligible for Canteen services provided by an entity (employer) to its employees

[VAIBHAV JAIN]

Input Tax credit eligible for Canteen services provided by an entity (employer) to its employees

The Government vide its recent Circular No. 172/04/2022-GST dated 6^th July 2022 has clarified various important issues under GST, where the Industry players needed a clear cut clarity on, and to avoid any further disputes and possible litigation. One such issue is from the perspective of availability of Input Tax Credit of goods or services under Section 17(5)(b) of the Central Tax act (CGST Act), where such goods or services or both are being used by an entity (employer) for its employees under an existing obligation of law for the time being in force.

Clarification issued in the Circular

Just to briefly state the issue at hand, the Government substituted section 17(5) of the CGST Act with effect from 1^st February 2019. After the substitution, a proviso after sub- clause (iii) of clause (b) of sub-section (5) of section 17 of the Central Tax Act was inserted which provides:

“Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.”

The Circular dated 6^th July 2022 has clarified that the above proviso is applicable to the whole of clause (b) of sub-section (5) of section 17 of the Central Tax Act and not limited to clause (iii) of Section 17(5)(b) of the CGST Act, which means that input tax credit would be available on all the following goods or services provided in section 17(5)(b) of the CGST Act which is: 

1. Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:
2. Membership of a club, health and fitness centre;
3. Travel benefits extended to employees on vacation such as leave or home travel concession

where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

Issue at hand

Now with respect to the issue at hand of input tax credit on canteen services, it is relevant to state here that various companies have been maintaining canteen facility at their premises for its employees as mandatorily required under the provisions of the Factories Act, 1948. Such canteen facility providing food/beverages/catering to the employees is generally run by a third party vendor (Canteen service provider). As per the arrangement, part of the Canteen charges is borne by the entity(employer) wherein the vendor charges  the entity with GST. The remaining portion is borne by the employees. The said employees’ portion of canteen charge is collected by the entity(employer) and paid to the Canteen Service Provider. There has been no dispute with respect to the charges of employee portion collected by the entity (employer) and paid to the Canteen service provider (vendor). The same doesn’t tantamount to be supply under GST.

Denial of Input Tax credit by authorities  

However, disputes had arisen on the availability of Input Tax credit for the GST paid on purchase of canteen services by the employer (entity) to the Canteen service provider (Vendor). In various Advance rulings the ‘proviso’ in question was interpreted to be not applicable for Section 17(5)(b)(i) of the Act and made applicable only for Section 17(5)(b)(iii) of the Act.

In IN RE: M/S. TATA MOTORS LTD. [2021 (8) TMI 735 - AUTHORITY FOR ADVANCE RULING, GUJARAT], the Advance Ruling authority held

8.3 we hold that Section 17(5)(b)(i) sub-clause ending with a colon and followed by a provisio which ends with a semicolon is to be read as independent sub-clause, independent of sub-clause Section 17(5)(b)(iii) and its proviso [of sub-clause (iii)]. Thereby, the provisio to Section 17(5)(b)(iii) is not connected to the sub-clause of Section 17(5)(b)(i) and cannot be read into it.

Similar inferences have been drawn in IN RE: M/S. EMCURE PHARMACEUTICALS LIMITED, [2022 (4) TMI 1335 - AUTHORITY FOR ADVANCE RULING, GUJARAT] and IN RE: M/S. MUSASHI AUTO PARTS PVT. LTD [2020 (2) TMI 1416 - AUTHORITY FOR ADVANCE RULING, HARYANA]

In all these Rulings, the effects of the proviso to cover all the goods and services mentioned in clause (b) of Section 17 of the CGST Act have been negated, in view of which Input Tax credit for the GST paid on purchase of canteen services by the employer (entity) to the Canteen service provider (Vendor) has been ‘denied’.

As a result of the said Rulings the GST authorities have been raising objections on the eligibility of credit and denying or asking the entities to reverse the same during investigations/audits with interest.  

Comments & Conclusion

In view of the above background, the present Circular clarifying the applicability of the said ‘proviso’ to the entire clause (b) of sub-section (5) of section 17 results in settling the issue of availability of Input Tax credit to entities (employers) providing Canteen services through third party vendors. It also resolves any other unwarranted issues which may arise on any goods or services enumerated in the said clause. The clarification is positive in nature and widens the scope of eligibility of input tax credit for the entities and gives relief from any unwarranted litigation.

Annexure –  Extract of the Circular 172/04/2022 dated 6^th July 2022

3.

Whether the proviso at the end of clause (b) of sub-section (5) of section 17 of the CGST Act is applicable to the entire clause (b) or the said proviso is applicable only to sub-clause (iii) of clause (b)?

1. Vide  the  Central Goods and Service Tax (Amendment Act) 2018, clause (b) of sub-section (5) of section 17 of the CGST Act was substituted with effect from 01.02.2019. After the said substitution, the proviso after sub- clause (iii) of clause (b) of sub-section (5) of section 17 of the CGST Act provides as under: “Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.” 2. The said amendment in sub-section (5) of section 17 of the CGST Act was made based on the recommendations of GST Council in its 28th meeting. The intent of the said amendment in sub- section (5) of section 17, as recommended by the GST Council in its 28th meeting, was made known to the trade and industry through the Press Note on Recommendations made during the 28th meeting of the GST Council, dated 21.07.2018. It had been clarified “that scope of input tax credit is being widened, and it would now be made available in respect of Goods or services which are obligatory for an employer to provide to its employees, under any law for the time being in force.” 3. Accordingly, it is clarified that the proviso after sub-clause (iii) of clause (b) of sub-section (5) of section 17 of the CGST Act is applicable to the whole of clause (b) of sub-section (5) of section 17 of the CGST Act.

Vaibhav Jain (Advocate)

Mobile: 9810729192

E-Mail [email protected]

Discussions to this article

[Amit Agrawal]

Does the Factories Act, 1948 mandates only 'provision of canteen facilities' from the employer for its employees or it also requires employer to provide food either free or subsidized rates to the employees?

If its former and not the later, can ITC can still be availed against GST charged against catering services by third party vendors?

[Amit Agrawal]

Will the restrictions u/s 17 (5) (g) (i.e. goods or services or both used for personal consumption) will act as stumbling block in availing such ITC?

In my view, the restrictions u/s 17 (5) (g) will not act as stumbling block in availing such ITC, more so because the specific wordings of proviso to Section 17 (5) (b) under discussion here.

W.r.t. my first post earlier, I am still working on my doubts.

Everyone is requested to share your views please.

[Sumit Srivastava]

I stumbled here.

The author mentions -

"Just to briefly state the issue at hand, the Government substituted section 17(5) of the CGST Act with effect from 1^st February 2019. After the substitution, a proviso after sub- clause (iii) of clause (b) of sub-section (5) of section 17 of the Central Tax Act was inserted which provides:"

May be, this is an inadvertent factual inaccuracy, as it is ONLY clauses (a) and (b) of section 17(5) that were substituted by Section 9 of the Central Goods and Services Tax (Amendment) Act, 2018 (No. 31/2018), dated 29-08-2018. Not to mention the Explanation that was also inserted below Section 17(3) by this Section 9 (supra).

So also, when the author says, "After the substitution, a proviso after sub-clause (iii) of clause (b)..." was inserted, one would comprehend that the "proviso" came after the substitution but which is not the ground reality. The proviso came along with the substitution.

Be that as it may, it seems that the Board probably fumbled and lost sight of the proviso which lurks below clause (i) and which reads -

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both 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;

If the proviso lying in wait after the clause (iii) is suppose to cover the whole of clause (b) of sub-section (5) of section 17 of the Act, as clarified by the Board in the referred Circular 172, then what is one to make out of the proviso below clause (i).

Ignore it for the love of ITC?

I sincerely think (as I only think and get things wrong most of the time) that the Board has probably committed a gaffe and it would not be long before the Circular 172 gets a fresh coat of paint.

As for clause (g) of s.17(5), that is down the river and we may come to that when we reach the bridge, as the saying goes.

An interesting article, though.

Nonetheless, interesting times ahead!

Thanks.

[Sundararaman Rajaram]

In the recent AAR issued to “Emcure Pharma” IN RE: M/S. EMCURE PHARMACEUTICALS LIMITED, [2022 (4) TMI 1335 - AUTHORITY FOR ADVANCE RULING, GUJARAT], while holding that the canteen & transport recoveries are not liable to outward GST, it has been observed “arranging for provision of food or transport facility” are not activities “done in the course of or in furtherance of developing, manufacturing and marketing of pharmaceutical products”. On this analogy, availing ITC for “non-business” purposes would be questionable in not be questioned ?

[Shivay Jain]

In regards to trailing conversation I have query regarding input availability

if Company running Labour mess/Canteen self through its employee and purchasing all Grocery Item from registered person then ITC will be available or not