Firms to not pay GST on part recovery of canteen payment from staff: AAR

Gujarat authority gives ruling in a matter involving Zydus Lifesciences; experts say greater clarity needed

Employers are exempt from paying the goods and services tax (GST) on part of money deducted from employees' salaries for payment to canteen service providers, according to the Gujarat-based authority for advance rulings (AAR).

Experts said that the Central Board of Indirect Taxes and Customs (CBIC) should come out with a clarification on the issue, as there is confusion despite the ruling.

The AAR gave the ruling after Zydus Lifesciences, which manufactures and distributes pharmaceutical products, approached the authority over this matter.

Zydus is registered under the Factories Act, 1948 and it is mandatory for it to provide canteen facilities to employees.

There is no independent contract between the company and the employees for setting up the canteen facility at the factory. It is being undertaken on account of the legal obligation cast upon the company.

The canteen service provider issues invoices to Zydus, but employees are the ultimate recipient of such a facility. The company merely allows the canteen service provider to use a demarcated area for serving food to employees. It makes payment to the canteen service provider on behalf of the employees for administrative convenience.

Part amount deducted from the salary of the employees is credited to the canteen expense account while the full amount of the invoice issued by the canteen service provider is booked as an expense in the company's profit and loss account.

The Gujarat AAR ruled that the company is not liable to pay GST on the amount deducted/ recovered from the employees. Anyway, the company is recipient of canteen service to facilitate the employees and canteen service provider raised the bill of canteen charges inclusive of GST as per the contract, noted AAR.

Saurabh Agarwal, tax partner at EY, said the issue has been ambiguous since the inception of GST legislation. Certain ambiguities were removed by government circulars though different pronouncements by the authorities for advance rulings have again created snags, he said.

He said some registrants have been paying GST on the open market value of meals in case part recoveries are made from the employees to avoid unwanted litigation which is ultimately becoming a cost to the business.  

This means that if the canteen bill is Rs 10,000 and the company recovers Rs 2,000 from employees, some companies are paying GST on the entire Rs 10,000 and not just Rs 2,000. This is despite the fact that canteen service providers are raising the bill inclusive of GST.

"A clarification from CBIC on this issue would help in bringing certainty of tax position for the industry," Agarwal said.