GST Update: Taxability of Employee Canteen Facilities & Recoveries
Reference: Maharashtra Authority for Advance Ruling (AAR) in the matter of KSB Limited [TS-1069-AAR (MAH)-2025-GST]
Executive Summary
The Maharashtra AAR recently issued a significant ruling regarding the GST implications for employers providing canteen facilities to their employees through third-party vendors. The core takeaways for businesses are:
- Free Canteen Services: If an employer provides canteen facilities completely free of charge to employees, it is treated as a non-taxable perquisite and attracts no GST.
- Subsidized / Paid Canteen Services: If an employer recovers any amount (partially or fully) from employees for canteen meals, the amount actually recovered is treated as taxable consideration, and GST is applicable on that recovered amount. The portion of the cost borne by the employer remains a non-taxable perquisite.
Detailed Background of the Case
The applicant, KSB Limited, is a manufacturer that operates multiple factories and is statutorily required under the Factories Act to provide canteen facilities for its workers. To fulfill this, the company engaged an independent third-party catering contractor.
The contractor invoiced the company with applicable GST, and the company subsequently recovered a subsidized portion of these canteen costs from its employees. The applicant argued that providing this facility was a statutory welfare activity, not done in the course of business, and therefore should not be treated as a taxable supply.
Key Findings by the AAR
1. Canteen Services Qualify as a “Business Activity” Despite the applicant’s contention that the canteen was purely a welfare measure, the AAR noted that the definition of “business” under Section 2(17) of the CGST Act is very wide. The Authority held that providing food to workers is an activity that is incidental and ancillary to the main business of manufacturing, thereby making it a transaction “in the course or furtherance of business”.
2. Two Distinct Supplies in the Chain The AAR identified that the arrangement involves two separate and distinct supplies:
- Supply of canteen services from the third-party vendor to the employer.
- Supply of canteen services from the employer to the employees.
3. The Role of “Perquisites” (Schedule III) Relying on CBIC Circular No. 172/04/2022-GST, the AAR observed that perquisites provided by an employer to an employee under a contractual agreement fall under Schedule III and are not subject to GST.
However, the AAR clarified that a facility only qualifies fully as a perquisite if it is provided free of charge. When an employer charges the employee (even a nominal or subsidized amount), the concession offered is the perquisite, but the actual monetary recovery constitutes “consideration” for an outward supply under Section 7 of the CGST Act.