GST Exemption for Notice Pay Deduction and Limited ITC for Canteen Facilities to the extend of cost borne by the assessee

The AAR, Gujarat, in the case of M/s. Tata AutoComp Systems Ltd[Ruling No. GUJ/GAANW2O23/23 dated June 19, 2023],held that deductions from employees' salaries for availing canteen facilities, transportation services provided to the employees and notice pay are not considered taxable under GST, and Input Tax Credit ("ITC”) can be claimed on GST charged by service providers, with restrictions based on the cost borne by the employer. 

Facts

M/s. Tata AutoComp Systems Ltd ("the Petitioner") is engaged in manufacturing, selling, and trading automotive parts, serving Indian and global automotive OEMs and Tier-I suppliers. The Petitioner has engaged canteen service providers (CSP) and transport service providers (TSP) to provide food and transportation services to their employees.

The Petitioner provides a canteen facility to its employees in compliance with the Factories Act. To provide this facility, the Petitioner deducts Rs. 500 per month from their employees' salaries, except for contract employees. The Petitioner also provides transportation facilities to its employees between the factory premises & the residence in non-air-conditioned buses having a capacity of more than 13 people. 

The Petitioner contended that the canteen facilities provided to employees are not a taxable supply under Section 7 of the Central Goods and Service Act, 2017 ("the CGST Act”), as it is a statutory obligation under the Factories Act. It is provided in the course of employment, not for business purposes, and there is no quid pro quo. Further, The Petitioner also seeks ITC on the GST charged by the CSP for catering services.

The Petitioner further contended that the transportation service is not a taxable supply under Section 7 of the CGST Act. It is provided for employee convenience and safety, following pre-approved routes. The Petitioner asserts that there is a legal obligation to provide this service to employees, and it should not be considered a supply in the course of or in furtherance of business.

The Petitioner relies on various rulings of Re:Tata Motors Ltd. [GUR/GAAR/R/39/2021 dated December 22, 2022], Re: Ion Trading India Pvt. Ltd. [2020 (32) G.S.T.L. 608 (AAR – GST – U.P.) dated September 25, 2019] and Circular No. 172/04/2022-GST dated July 06, 2023. The Petitioner has a policy of deducting an amount from employees' full and final settlements if they leave the company without serving the specified notice period. This deduction is a compensation for breach of employment terms and is not collected separately from employees.        

The Petitioner argues that there is no GST on notice pay as this deduction is not a consideration for tolerating an act or situation. 

Issues

• Whether the deduction of a nominal amount from employees' salaries for availing the facility of food will be considered as 'supply of service' under Section 7 of the CGST Act and whether ITC is available to the Petitioner on the GST charged by the CSP for providing catering services? 
• Whether the services of transportation facility would be construed as ‘Supply of Services’ under Section 7 of the CGST Act and whether ITC will be available on the GST charged by the transporter?
• Whether Is GST applicable on salary deducted in lieu of notice period from the full and final settlement of the employees leaving the company without completing or serving the complete notice period?

Held

The AAR, Gujarat in Ruling No. GUJ/GAANW2O23/23 ruled as under:

• Observed that, as per Circular No. 172/04/2022-GST dated July 06, 2023, the contractual agreement entered between the employer and employee will not be subject to GST when the same is provided in terms of the contract between the employee and employer. 
• Further observed that, the ITC will be available to the Petitioner in respect of canteen facilities provided under the Factories Act, 1948. However, ITC on GST charged by CSP will be restricted to the extent that the Petitioner bears the cost.
• Opined that, the ITC under Section 16 of the CGST Act can be claimed, subject to the conditions and restrictions specified in Section 49 of the CGST Act. The services received by the Petitioner are used in their business, making them eligible for ITC on the GST charged by their suppliers. Additionally, the amended Section 17(5) of the CGST Act allows ITC on leasing, renting, or hiring motor vehicles with a seating capacity of more than 13 persons (including the driver).
• Held that, the Petitioner is not liable to pay GST on the amounts deducted towards notice vide Circular No. 178/10/2022-GST dated August 07, 2022, wherein no GST is applicable on the salary deducted in lieu of the notice period. The deduction is not considered a supply under GST and is viewed as compensation for the breach of employment terms.  

Our Comment

This advance ruling is applaudable for categorizing canteen services provided to the employees as supply and allowing ITC till the cost borne by the assessee. However, contrary rulings were pronounced in the past. 
Under AAR, Maharashtra in Re: Emcure Pharmaceuticals Ltd. [2022 (60) G.S.T.L. 231 (AAR – GST-Mah.)], canteen facilities provided by the employer to its employees through third-party vendors are not a transaction made in the course or furtherance of business, and hence, cannot be considered as a "Supply” under the provisions of the CGST Act and therefore the employer is not liable to pay GST on the recoveries made from the employees towards providing canteen facility at subsidized rates. 

Relevant Provision

Section 7, of the CGST Act:

Scope of supply-

(1) For the purposes of this Act, the expression supply includes–– 

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business;[and]
(c) the activities specified in Schedule I, made or agreed to be made without a consideration;
[(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.]

(2) Notwithstanding anything contained in sub-section (1),–– 
(a)  activities or transactions specified in Schedule III; or 
(b)  such activities or transactions undertaken by the Central Government, a  State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, 
shall be treated neither as a supply of goods nor a supply of services. 

(3) Subject to the provisions of [sub-sections (1), (1A) and (2) the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as— 
(a)  a supply of goods and not as a supply of services; or 
(b)  a supply of services and not as a supply of goods.