GST Win for Pharma Giant: AAR Allows ITC on Mandatory Canteen Services Under Factories Act [Read Order]

In a key decision for employers, the Gujarat Authority for Advance Ruling (AAR) has allowed input tax credit (ITC) on GST paid for mandatory canteen services provided to employees under the Factories Act. The ruling benefits companies legally required to run staff canteens, clarifying that such expenses qualify for tax credits under GST laws.

The applicant, Amneal Pharmaceuticals Pvt. Limited, a Gujarat-based drug manufacturer with over 250 employees, had sought clarity on whether it could claim ITC for GST charged by its canteen service provider. The company argued that since Section 46 of the Factories Act, 1948, and Gujarat Factory Rules, 1963, mandate canteen facilities for large factories, the proviso to Section 17(5)(b) of the CGST Act should permit ITC for these services.

The AAR agreed, ruling that ITC is admissible for the portion of canteen costs borne by the employer, provided the facility is legally compulsory. The authority cited a 2022 CBIC circular (No. 172/04/2022-GST) which clarified that the proviso to Section 17(5)(b) applies to all sub-clauses, including food and beverages, when supplied under legal obligation. The ruling aligns with an earlier Gujarat Appellate AAR decision in the Tata Motors case (2022), where similar relief was granted.

Notably, the credit is restricted to the employer’s share of expenses. Amneal recovers part of the canteen cost from employees, and the AAR clarified that ITC cannot be claimed for amounts collected from staff, as these are considered recoveries rather than business expenses. The ruling emphasized that the mandatory nature of the canteen under labor laws distinguishes it from voluntary perks like gym memberships or optional catering, which remain ineligible for ITC.

The bench, comprising Member (SGST) Kamal Shukla and Member (CGST) P.B. Meena, underscored that the 2019 amendment to Section 17(5)(b) and subsequent CBIC guidance explicitly support ITC for employer-mandated benefits. The decision provides much-needed clarity for manufacturers, especially in sectors like pharmaceuticals, where large factories must operate canteens under labor regulations.

For Amneal and similar companies, the ruling reduces compliance uncertainty and lowers the net cost of providing statutory canteen services. By allowing credits on the employer’s contribution, the AAR has reinforced the GST framework’s intent to avoid double taxation on legally required business expenditures.

The order is expected to streamline GST practices for factories across Gujarat and potentially influence interpretations in other states where the Factories Act applies. Employers with similar obligations may now revisit their ITC claims to ensure compliance with this clarified position.

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