GST AAR on Canteen Services

The Authority of Advance Ruling (AAR) in Kerala had passed an advance ruling clarifying that GST would be applicable to payments made by an employee of a company towards canteen expenses. This advance ruling is a significant shift from the existing service tax regulations and has enormous implications for employers operating a canteen on their premises for use by their employees. In this article, we look at the GST AAR on Canteen Services in detail.

GST Advance Ruling Authority (AAR)

The GST Council made the Advance ruling under GST very friendly for the taxpayer under GST. The advance ruling helps taxpayers plan for GST liability in advance. An advance ruling is binding on both the taxpayer and the Government. Hence, an advance ruling can also be used by the taxpayer to avoid costly litigations. One of the major advantages of advance ruling under GST compared to advance ruling under service tax is that under GST, an advance ruling can be obtained on a proposed transaction as well as a transaction already undertaken by the appellant. To handle all aspects of advance ruling under GST, the Government has created the Authority for Advance Ruling (AAR), which can give a binding ruling to an applicant who is a registered taxable person or is liable to be registered.

Advance Ruling on Canteen Service

The Caltech Polymers Private Limited, a maker and trader of footwear in Kerala, Malappuram, requested the Advance ruling on Canteen services. As the factory employs more than 250 employees, the company was legally forced to render canteen services to its employees as per Section 46 of the Factory Act,1948. To implement the rule, the company allotted space for the canteen inside the factory premises, and the cost incurred to run the services was retrieved from the employees as an abstraction from their monthly payments relative to the food intake. In the application to AAR, the company stated the following facts:

The company provides the space for the canteen inside the factory premises.
The company hired the, and the cook receives a salary from the company.
The Company obtains the vegetables and other items required for preparing the food items directly from the suppliers.
The company tracks the number of times using the Canteen facility each day by the employees on a daily basis.
Based on the details above, the expenditure incurred by the company on the vegetables and other items required for the preparation of food is recovered from the employees, as a deduction from their monthly salary, in proportion to the foods consumed by them.
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.

Hence, the company contended that the activity of providing canteen services to its employees does not fall within the scope of supply, as the same is not in the course or furtherance of its business. The company only facilitates the supply of food to its employees, which applies as a statutory requirement, and thus recovering only the actual expenditure incurred in connection with the food supply, without making any profit.

AAR on Canteen Services

In the AAR ruling on Canteen services, the Authorities made the following observations and justifications for holding canteen services provided to an employee as taxable under GST.

Definition of Business

As per Section 2(17) of the GST Act, the term "business" defined as "Business" includes the following:

(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)

Hence, the definition of "business" includes a transaction incidental or ancillary to the main business. Thus the supply of canteen services to employees would be a supply that is transaction incidental or ancillary to the main business and is taxable.

Activities Treated as Supply

Schedule II to the GST Act describes the activities to be treated as a supply of goods or supply of services. As per clause 6 of the Schedule, the following composite supply is declared as the 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." Hence, even though there is no profit, the supply of food to its employees, would be a "supply" as provided in Section 7(1)(a) of the GST Act, 2017.