GST ITC on Goods & Services Provided by Employer to Employees: What's Blocked, What's Not?

The Input Tax Credit (ITC) mechanism under India’s Goods and Service Tax (GST) regime is designed to eliminate cascading taxes and ensure tax is levied only on value addition. However, when it comes to goods and services provided by employers to employees, ITC eligibility becomes complex. This complexity primarily arises due to Section 17(5) of the CGST Act, which specifies “blocked credits” situations where ITC is not allowed even if GST has been paid.

There are multiple advance rulings supporting the view that GST is not leviable on recovery of the expenses from the employees for third party services. These include Caltech Polymers Pvt. Ltd. [2018 (AAAR, KERALA)], wherein the Appellate Authority for Advance Ruling upheld the decision of Advance Ruling Authority which held that GST is payable on recovery made from employees for providing the canteen facility. Other cases such as Re: Emcure Pharmaceuticals Ltd. (2022) and Re: Amneal Pharmaceuticals Pvt. Ltd. (2022) are also of crucial importance.

Section 17(5)

Under GST law, employers and employees are treated as related persons, and certain transactions between them may qualify as “supply.” However, services provided by an employee to an employer in the course of employment are outside the scope of GST (Schedule III). Section 17(5) explicitly blocks ITC on certain goods and services.

This provision provides a list of 11 clauses on which ITC is not available for claims. Section 17(5) of CGST Act overrides provisions of Section 16(1) “Availability of ITC in general when used for business” and Section 18(1) “ITC availability in special cases”.

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Common Employee-Related Expenses: What’s Blocked

a) ITC is not available on food, beverages, and catering services provided to employees. This includes canteen expenses, refreshments, and corporate meals.

b) Outdoor Catering as well as Health & Beauty Services are blocked under ITC provisions.

c) Club Memberships including gym or health centre subscriptions are treated as personal consumption rather than business expenditure.

d) ITTC is disallowed on Rent-a-Cab services for employee commute. Insurance policies including health and life unless specific exceptions apply are also disallowed.

e) Leave Travel Allowance (LTA) or similar vacation-related travel benefits for employees are not eligible for ITC.

f) If goods are given as gifts, ITC is blocked. Additionally:

• Gifts up to ₹50,000 per employee per year are not treated as supply
• Gifts exceeding ₹50,000 may attract GST liability

3. Exceptions: What’s Not

Despite the above restrictions, the law provides important exceptions. For example:

• Canteen services mandated under the Factories Act, 1948
• State labor regulations under Shops and Establishments Act, 1948
• Uniforms and safety gear under Occupational Safety, Health and Working Conditions Code, 2020
• Employee training programs under Companies Act, 2013
• Skill development workshops under Skill India Mission of 2015

4. Contractual vs Non-Contractual Benefits

The CBIC has clarified vide Circular 172 that GST is not applicable on perks provided to employees, which form part of the contractual agreement. It also clarifies that the same is in line with Schedule III of the CGST Act, which clearly states that any service by an employee to the employer during employment is outside the scope of GST. However, ITC eligibility still depends on whether the expense is blocked under Section 17(5).

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5. Key Tests for ITC Eligibility

To determine whether ITC is available on employee-related expenses, businesses should apply the following tests:

a) Is the expense incurred in the course or furtherance of business? If not, ITC is disallowed.

b) Is the benefit mandated by law? If yes, ITC is allowed even for otherwise blocked categories.

c) Does the expense fall under the blocked list (food, travel, insurance, etc.)? If yes, ITC is generally not available.

Conclusion

GST law draws a fine distinction between business expenses and employee welfare benefits, thus businesses must exercise caution while claiming ITC on employee benefits. While ITC is a powerful tool to reduce tax liability, Section 17(5) restricts its use in several employee-related scenarios. Most voluntary benefits such as food, travel, and recreational facilities fall under blocked credit, and are commonly misclassified which can lead to disputes during audits.

Therefore, businesses must carefully evaluate each employee-related expense, maintain proper documentation, and align their ITC claims with statutory provisions to ensure compliance and avoid litigation.

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