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Employee recoveries and dilemma under GST

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It is a common corporate practice to provide facilities such as canteen, transportation, and other facilities to employees either as a statutory obligation or as a welfare measure and these expenses provided to the employees is a part of the cost to the company otherwise called as CTC. In such cases, the company recovers a nominal portion of the cost from the employees.

With the introduction of GST, given that every form of supply has come under the ambit of GST tax net, the question that arises is whether such recoveries made from employees would become taxable in the hands of the employer as supply of canteen or transportation services.

Many taxpayers have approached advance ruling authorities for getting clarity on the said aspect, and there have been varying views on this issue by the advance ruling authorities. Initially in 2018, the Appellate Advance Ruling Authority (AAAR) in the case of M/s. Caltech Ploymers Private Limited    [2018-TIOL-20-AAAR-GST (Kerala)]considered whether recovery of canteen cost from employees would constitute a supply. The AAAR concluded that despite the lack of any profit, the activity of supplying food and charging price for the same employees would come within the definition of “supply” and the amount recovered from the employees would qualify as a consideration liable to tax.

On the contrary, recently the Maharashtra Advance Ruling Authority in the case of Emcure Pharmaceuticals Limited [GST-ARA-119/2019-20/B-03 dated 4 January 2022] has held that the provision of canteen facility to the employees is not taxable on the account of the fact that the same is not in the course or furtherance of business of the company. However, it is pertinent to mention that the ruling in the case of Caltech Polymers has not been considered in Emcure Pharma and many such rulings have been passed on the same lines as Emcure Pharma.

In the light of these contrary rulings, it is now important for taxpayers to evaluate the applicability of these rulings to their factual situation and evaluate a litigation free course of action. However, it is important to note that advance rulings are binding only on the party for whom such ruling has been pronounced. To prevent a flurry of litigation on this issue, the GST authorities can consider clarifying the position considering that this is an industry wide issue.

(The Writer is Manager, BDO India LLP)

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