Non-payment of GST on Services Provided to the Employees Without Consideration

Where the taxable person provides Canteen Expense, uniform, Accommodation and Conveyance services to their employees free of charge.

Treatment: The facilities of Canteen, Accommodation, uniform & conveyance are in the nature of perquisites governed by contractual arrangement between employer & employees hence are not subject to GST as clarified by CBIC by their press release dated 10.07.2017 which is attached herewith for ready reference.

http://cbic.gov.in/resources//htdocs-cbec/press-release/pres-rls-gst-gift-dt10july.pdf

PRESS RELEASE DT 10.07.2017

The question arises for the taxation of perquisites. It is pertinent to point out here that the services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods or supply of services). It follows therefrom that supply 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. Further, the input tax credit (ITC) scheme under GST does not allow ITC of membership of a club, health and fitness centre [section 17 (5) (b) (ii)]. It follows, therefore, that if such services are provided free of charge to all the employees by the employer then the same will not be subjected to GST, provided appropriate GST was paid when procured by the employer. The same would hold true for free housing, free canteen and uniform to the employees, when the same is provided in terms of the contract between the employer and employee and is part and parcel of the cost-to-company (C2C).

As per Section 7 (1) “supply” includes––

1. all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

As per Section 2 (17) “business” includes––

1. any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
2. any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
3. any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;
4. supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;
5. (e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;
6.  admission, for a consideration, of persons to any premises;
7.  services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;
8.  services provided by a race club by way of totalisator or a licence to book maker in such club ; and
1. any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

Providing canteen services, conveyance, accommodation, uniform etc. do not qualify under the definition of business as company is not in the business of providing these service. These activities are not the business activities as these are emanating from contractual obligations which are customarily provided by the Industry hence cannot therefore be termed as a transaction done “in the course of business or in furtherance of business”, therefore on this count it won’t be a SUPPLY and hence cannot be a taxable supply.

This type of very issue has been tested in the courts including the Supreme Court of India in many cases under the VAT regime. Under majority of the judgments, courts have said that sale of goods can be brought to tax only if done with an intention of doing business in those goods and not otherwise.

In the case of Panacea Biotech Ltd. the issue was taxability of sale of used car under Delhi VAT and whether the same was covered in the definition of “business”. Hon’ble Delhi High court in this case has held that the same will not be regarded as sale ‘in connection with or incidental or ancillary to’ business and hence shall not be taxable.