The Canteen Conundrum: Exploring the uncertainty around GST and employee canteens.

 The Canteen conundrum: Exploring the uncertainty around GST and employee canteens.

 

The issue regarding GST implications on factory canteens for employees has now been a long-standing issue. It has troubled practitioners, employers, and their factory men alike. The issue is not res integra, but the numerous non-concurring opinions presented, both by experts and authorities, have kept this question indefinite, with millions of answers and opinions, although none have been sufficient to answer this question once and for all.

 

So, let's break down the issue, and try to reason our way to a satisfactory answer. 

 

Firstly, what is the exact issue?

To put it in a very uncomplicated way, The canteen services given to employees, either as a perquisite or under a statutory mandate, whether would amount to supply and thus subject to GST, is the issue.

Sounds undeniably simple, but because of the number of opposing opinions, the mystery continues.

Now, before the uncertain part is discussed, it is necessary to bring the reader’s attention to the circular released by the CBIC which pretty much answers the question. However, this is restricted to when such services be it food, travel, or other allowances, when made as per the terms of the employment contract shall stay out of the purview of GST.

So, we can safely say that any perk or service given as a part of the employment service, with or without consideration in the course of the employment contract shall not be treated as supply.

But now breaking down the entire issue: why at all, has this been a question, and why has it caused so much confusion?

See, for anything to be subject to GST, it must be a “supply,” and supply is defined as all forms of supply of goods or services, on sale, lease, transfer, barter, exchange, or disposal made or agreed to be done for consideration in furtherance of Business.

This highlights two components, which go ahead to play a menace in this entire issue.

1.      For consideration:

As per the definition then, consideration is an essential to supply, and any supply shall be subject to GST only if it is in exchange of a consideration. This however, has exceptions, and the Act further states that if a supply is made between an employer and employee (related parties), even if without consideration, it would amount to Supply

So, I think it would be safe to say with or without consideration, the service could still amount to Supply, as per the definition, provided it be made in the furtherance of business.

This article would not list the number of conflicting opinions given by different AARs and other authorities, but would investigate an independent interpretation, considering the background of the case.

Would these services with, or without, or with discounted consideration, amount to supply is the question moot here.

As seen earlier, furtherance of business is one indispensable requirement. In its ordinary sense, or from a well-read man’s perspective, the term could imply anything that is done to carry on one’s business, or anything that is done for the smooth operation of one’s business. Business, here being interpreted as its definition given in the CGST Act.

Now the interpretation of the phrase “course or furtherance of business” has received quite some judicial interpretation.

The term business has been defined as:

Including: -

(I) any trade, commerce or manufacture or any adventure or concern in trade, commerce, or manufacture, whether such trade, commerce, manufacture, adventure, or concern is carried on with a motive to make gain or profit and whether any gain or profit accrues from such trade, commerce, manufacture, adventure, or concern, and

(ii) any transaction in connection with, or incidental ancillary to, such trade, commerce, manufacture, adventure, or concern.

 

Not only has the main trade been included as business, but also any activity that is done in connection with, or incidentally or as an ancillary to the main trade. Thus, this pre-supposes and mandates that there ought to be some sort of trade carried on.

This could be ascertained by the motive why the company was established, and so on.

But the real question is now “in connection, ancillary, and incidental,” since the former part seems unambiguous.

As per my interpretation, I think these are words which signify assistance, or a sense or help, or something that is inevitably a part of a concerned business. It could be explained that the transaction is to relate to trade, it has something to do with trade or has the incidence or elements of trade or commerce.

It has also been observed by courts that for an activity to be considered “business” the intention with which it is done has to be considered, which could be understood by the frequency, volume, and continuity of such activity, among other things.[1]

Although there is no definite test to ascertain whether an activity would incidentally form a part of business or no, a test of inference or direct-result could be adopted. Whether such service, or good is the by-product or obvious result of the main business, could be used.[2]

I do not find any flaw in this reasoning. It is only logical, although on deep deliberations one could take a differing view too. But coming back to the question what is something that is done in “course or furtherance of business” could be shortly stated as anything which either helps the business function, or is the direct and obvious result of the carrying of such business.

By this logic, a canteen service supplied as a benefit or a statutory mandate to one’s employee, the charges of which are recovered from an employee’s CTC should not be considered as Supply as per the GST act, because the absence of nexus in the main business vocation of a company and the canteen service.

 

This was breaking down or reasoning though the entire issue.

 

References

Supply in the course of business: Nitya Tax Associates, http://nityatax.com/wp-content/uploads/2019/06/Supply-in-the-course-or-furtherance-of-business.pdf

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[1] Panacea Biotech Ltd. vs Commissioner Of Trade And Taxes, Del HC, https://indiankanoon.org/doc/47842945/

[2] State Of Gujarat vs M/S. Raipur Manufacturing, 1967 AIR 1066, https://indiankanoon.org/doc/1535888/