• Dated 31^st January, 2025

Availability of ITC in respect of inputs or input services used for providing catering and health care services by the registered person to it employees under statutory obligation

Fact of the case:

If a registered person operates dispensaries and medical clinics and also runs and provide canteen facility at their place of business for their employees & workers under statutory obligation in terms of some statutory laws such as The Mines Act, 1952, The Factories Act, 1948 etc. For operating such activities, the company will have to procure inputs such as medicines and obtain canteen services from an outside vendor.

In relation to these inwards supplies, whether the ITC will be available towards the procurement of the inputs or input services or both? In relation to the same, detailed analysis and clarification has been provided below:

Analysis and Clarification:

As per Section 17(5)(g) of the CGST Act, 2017, ITC is not available for goods or services used for personal consumption.

Furthermore, as per Section 17(5)(b)(i) of the CGST Act, 2017, Input Tax Credit (ITC) cannot be available for expenses on "food, drinks, outdoor catering, beauty treatments, health services, cosmetic or plastic surgery, and renting or hiring vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance". In line of the same the following proviso is also available under the said section:

"Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply".

"Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.]

However, ITC is allowed if providing these goods or services is a legal requirement for the employer under any prevalent law."

In the view of the above provision, it is understandable that as per section 17(5)(b)(i) Input tax credit (ITC) is not available in case of inward supply of Food, drink, catering services and health care services. However, the ITC on the same is allowed if the inward supply under these activities are done for making of an outward supply and if the same is required in terms of any legal requirement for the employer under any law for the time being in force.

Further, the CBIC vide Circular No. 172/04/2022-GST dated 6th July, 2022 has clarified various issued pertaining to GST. As per SL. 5 of the said circular, perquisites provided by the 'employer' to the 'employee', in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST when the same are provided in terms of the contract between the employer and employee. Accordingly, the subsidized deduction made by the applicant from the employees who are availing food in the factory would not be considered as a 'supply' under the provisions of the GST Act.

Hence, based on the above, if the company is providing any perquisites to their employee (In our case Canteen services and health care services), GST will not be leviable since the same is not forming a part of the defecation of Supply under GST. In line of the same, ITC will not be admissible for the said matter.

In relation to the same query, the view from the following Advance ruling can be referred:

In the Advance Ruling vide Order No. 32/AAR/2019 dated July 25, 2019 (Tamil Nadu) on the case of Chennai Port Trust, wherein the applicant is maintaining an in-house hospital within its port premises for providinghealth and medical cover exclusively to its employees and pensioners. The hospital is only a cost centre and the inward supply of medicine and related services is provided to the employees and pensioners without charging any separate consideration. Further, no outsiders are treated except by employees. In the case the employees are referred to empanelled hospitals, the costs are borne by the Applicant themselves. Evidently, the impugned goods and services are used for providing personal medical care to the individuals who are the employees and pensioners of the Applicant. They are in effect used for personal consumption of the employees, pensioners and dependents. In line of the same, view of section 17(5)(g) of CGST act has been considered.

Ultimately, it was determined that applicant is not eligible to claim Input Tax Credit (ITC) on the inward supply of medicines used to offer free medical facilities to employees, pensioners, and their dependents through its in-house hospital.

Further, in the Advance Ruling vide order No. HAAAR/2020-21/06 dated September 09,2020 (Haryana) in thecase ofMusashi Auto Parts India Private Limited, it was determined that the canteen services are provided on a NOT-FOR PROFIT basis and the same has been mandated by the Factories Act. They are also uniformly available to all the employees. These canteen services are, therefore available to the employees essentially as a facility in the course of their employment akin to uniform, safe-environment and first aid. Therefore, the provision of canteen services provided to employees is not a taxable activity chargeable to GST. The benefit of the proviso is not applicable to canteen services/supply of food and beverage which is point no (i) of section 17(5)(b). Accordingly, ITC is not admissible to the applicant in respect of the canteen services provided.

Further, an adverse ruling has also been identified which is pertaining to the M/S. Suzuki Motor Gujarat Pvt Ltd., 2024 (2) TMI 848 – AAR, Gujarat, wherein it has been clarified that the applicant is eligible to avail input tax credit in respect of the GST charged by the canteen service provider for the canteen facilities provided to its permanent employees in view of the provisions of Section 17(5)(b) as amended effective from 1.2.2019 and clarification issued by CBIC vide circular No. 172/04/2022-GST dated 6.7.2022 read with provisions of section 46 of the Factories Act, 1948 and read with provisions of Gujarat Factory Rules, 1963. ITC on the above is restricted to the extent of the cost borne by the applicant for providing canteen services to its employees, but disallowing proportionate credit to the extent embedded in the cost of goods recovered from such employees. However, in the said Advance ruling, ITC were not allowed in respect of inputs i.e. equipment and kitchen utensils utilized for providing the canteen facilities.

Conclusion:

Based on the above discussed advance rulings along with the view of the relevant provision, it is evident that different interpretations have been derived from different rulings. However, it can be understood that these services are provided by organizations to their employees on a not-for-profit basis. Although the provision of such services may be legally mandated under prevailing laws, they are primarily intended for personal consumption by employees. These services do not form part of activities that contribute to the furtherance of business or the making of outward supplies of goods or services.

Therefore, it can be concluded that Input Tax Credit (ITC) on these inward supplies will not be available in accordance with Section 17(5)(b)(i) along with Section 17(5)(g) of the GST Act.

Author: Harsh Kr Gupta