When a complex law like GST is slowly evolving, when authorities like Advance Ruling are approached, it has to be on a very cautious note and all possible arguments should be duly taken. Further, the efficacy of the Advance Ruling mechanism under GST, manned by fairly junior level officers of the Department, without the presence of any Member with the Judicial background, is also doubtful. Further, with Advance Ruling Authorities constituted in each State, the contrary decision on the same subject would also be the order of the day.
The decision of the GST Advance Ruling Authority, Kerala, to the effect that the cost recovered from employees, by the employer, towards using the canteen facility provided by the employer is a “supply” and hence liable to GST, has come as a big shock.
It may be noted that as per the provisions of various enactments such as, the Factories Act, the employer is bound to provide canteen facility to the employees. While some of the employers provide free food, by and large, subsidised food is being provided to the employees in such canteens. Provision of such facility, either free food or subsidised food is in the form of perquisites in the hands of the employee, for the services provided by the employee to the employer. It cannot be treated as an independent supply by the employer to the employee.
Reference is also invited to the Press Note issued by the Government, containing the following clarification, which signifies the intention of the Government.
Another issue is the taxation of perquisites. It is pertinent to point out here that the services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods or supply of services). It follows therefrom that supply by the employer to the employee in terms of the contractual agreement entered into between the employer and the employee, will not be subjected to GST.
The ruling proceeds merely on the basis that the supply of food in the canteen of the employer is in the course of business and the amount charged is the consideration. There can be no quarrel on the above parameters. But what has been missed out is that as per S.No.1 of Schedule III of the CGST Act, 2017, services provided by the employees to the employer are not considered as supply and hence, the subsidised food provided by the employer to the employee, by way of consideration for the services provided by the employee, cannot be subjected to GST levy.
The decision of the Advance Ruling Authority would give raise to the following consequences.
It may be noted that employers and employees are treated as related persons, as per Section 15 (5) of the CGST Act, 2017. As per S.No. 2 of Schedule I of the Act, supply of goods are services between related persons, made even without consideration would be a supply. So, even if the employer provides free food to its employees, as per S.No.2 of the Schedule I of the Act, it may be considered as a supply. Since the parties are related, valuation in such case, be it free supply or subsidised supply, shall be determined as per Rule 28 of the CGST Rules, 2017, i.e. based on “open market value” or by any other method prescribed in Rules 28 to 31 ibid. All this would lead to unimaginable consequences.
It is strongly felt, with due respect, that the impugned decision of the Advance Ruling Authority is duly appealed against. Or, in order to put at rest the controversies, the Government may clarify the issue in more clear terms.
G Natarajan
G. Natarajan, Advocate, Swamy Associates.
