The Factories Act, of 1948 states that employers with 250 employees or above should provide canteen facilities to maintain a conducive work environment. Employers often provide canteen facilities for employees, either free of cost or at a nominal price, as a voluntary gesture of goodwill. These facilities are vital for maintaining a positive work environment.

However, the introduction of Goods and Services Tax (GST) has added complexity to the taxation of canteen services, affecting employees, contractual workers and other personnel. Keep reading to learn further about the GST on canteen services.

Understanding GST on Canteen Facilities

The application of GST on canteen facilities involves permanent and contract workers. The recent ruling by AAR (Appellate Authority of Advance Ruling) states that permanent employees are not liable for GST. However, the canteen service provider can charge ITC (Input Tax Credit) for the taxable supply of food from the permanent employees. The recoveries from the contract employees may be subject to GST and this is known as outward supplies.

GST on Food Services

The GST rate on food services varies based on several factors, ranging from 5% to 18%. This tax structure has replaced the previous VAT and service tax regime. However, alcohol still adds VAT, a state-level tax. Hence, the bar cum restaurants that offer foods and beverages include GST on food items and VAT on alcoholic beverages. The applicable GST rates on food services and items will be discussed in detail:

• Restaurants (both air-conditioned and non-a/c): It offers 5% GST on food services.
• Hotels: 5% GST on the restaurant services are charged by the hotels. This is charged on room service and takeaway. The room tariff must be under ₹7,500.
• Canteens in Institutions: Canteens and cafeterias are on a contract basis in schools, colleges and offices charge 5% GST on food and beverages (non-alcoholic).
• Indian Railway: IRCTC charges 5% GST on meals and food items on trains and platforms.
• Hotels above ₹7,500: These hotels whose tariff goes above ₹7,500 charge 18% GST on restaurant services including room service and takeaway.
• Club or Guest House: A restaurant or food joint housed within a hotel charges 18% GST on food services including the food delivery system.
• Catering Industry: Any outdoor catering services charge 18% GST.

GST on Food Products

Here is the list detailing the key GST rates on some common food items:

• Vegetables: Veggies like potatoes, garlic, onions, and leeks do not have any GST rate.
• Legumes: Packed leguminous vegetables include a Nil GST rate.
• Fruits: There is no GST rate applied on fruits like fresh/dried coconut, bananas, grapes, pears, and apples.
• Meat: No GST rate is applied to meat.
• Eggs: There is a Nil GST rate for bird’s eggs.
• Packaged Meat: 5% GST is charged on packaged meat.
• Cooked Eggs: 5% GST is applied on eggs not in shell or cooked.
• Vegetables under GST charge: A 5% GST rate is applied on ginger, turmeric, bay leaves and so forth.
• Powder of Legume Vegetables: There is a 5% GST rate imposed on powder legume vegetables.
• Preserved Items: Individuals must pay a 12% GST rate for those vegetables, fruits and nuts preserved with vinegar.

Effects of GST on Food

GST implication has replaced many previous taxes from the restaurant bill. Earlier, there used to be multiple taxes such as VAT, Service Tax and others applied to the bill. However, the service charge has remained the same which is charged by the restaurants along with GST rates.

Implementation of ITC was thought to be beneficial for the restaurant owners. It seemed that the availability of ITC would enhance the working capital. However, input tax credit is available only for those restaurants that are charging 18% GST on food services.

Many food items, like fresh vegetables, fruits, and meat, are exempt from GST, falling under the Nil rate bracket. Only packaged foodstuffs are subject to GST, with rates not exceeding 18%. Notably, no food facilities are taxed at the highest GST rate of 28%.

Real-World Implications for Canteen Operations

Now when it comes to ITC application on canteen facilities, it has had significant benefits for business expenses. By applying this provision of canteen charges, employers can reduce their GST burden which would reflect in lowering the overall expenses. However, there might be some challenges that business owners have to face while claiming ITC on canteen services. Some of these are discussed below: 

• The misconception of ITC can result in inappropriate claims.
• Incorrect documentation can result in denied input tax credit claims at the time of audit.
• Compliance burden can be an issue for small and medium-sized businesses.

Calculating Input Tax Credit for Canteen Services

ITC calculation for canteen services involves several steps. Employers first need to calculate the total expenditure spent on the canteen facility and out of that they can only ask for the amount they have invested.

For instance, if an employer charges their employees for a canteen facility, they cannot show this part in their ITC claim. They need to exclude the amount. Only the expenses on the canteen facility could be claimed in the form of ITC.

Significant Legal Disputes on GST and Canteen Charges

The GST rates on canteen services and the ITC eligibility have been examined thoroughly by different authorities. It leads to extreme confusion.

Let’s delve deeper into the compiled list of advance rulings from different states:

• Suzuki Motor Gujarat PVT LTD

As per the Gujarat factories rules, there is no GST on canteen charges. ITC can be applied under the Factories Act, of 1948 for permanent employees.

• Kirby Building Systems & Structure

GST exemption is enlisted if the record states the cost is carried by the employer. It is eligible for Input Tax Credit under Section 17(5)(b) of the CGST Act.

• KOHLER India Corporation PVT LTD

GST charges are not applicable under a contractual agreement. ITC is accessible for employers only for the charges they have borne.

• Tube Investment of India Limited

The provision of food in the canteen at a nominal cost is classified as a ‘supply’ under GST. ITC on GST charged by the caterer on catering charges is applicable for the cost invested by the employer.

• Sundaram Clayton Limited

This ruling states that the GST on a portion of canteen charges applies to the nominal amount collected from employees.

The Bottom Line

The introduction of GST on canteen services has allowed employers to better manage expenses. To claim GST Input Tax Credit, employers must adhere to specific guidelines, which not only help in optimizing tax savings but also contribute to increased employee satisfaction. By following these guidelines, employers can effectively manage their GST obligations and improve overall workplace morale.

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