Maharashtra AAR Holds GST Payable on Employee Canteen Recoveries, Not on Notice Pay Recoveries Under CGST Act

Background and Issues:
The applicant, Piaggio Vehicles Pvt. Ltd., sought advance rulings on two key questions under the Central Goods and Services Tax Act, 2017 (CGST Act) and the Maharashtra Goods and Services Tax Act, 2017 (MGST Act): (1) whether GST is payable on recoveries from employees’ salaries for subsidized canteen facilities, and (2) whether GST is payable on notice pay recoveries from employees who do not serve the full notice period.

Applicant’s Contentions:
The applicant argued that recoveries for canteen facilities are not ‘supply’ under Section 7(1)(a) of the CGST Act, as providing canteen services is not their business activity but a statutory obligation under the Factories Act, 1948. They further contended that such facilities are not incidental or ancillary to their main business and are excluded from the scope of supply under Section 7(2) read with Schedule III. Regarding notice pay recoveries, the applicant submitted that these are not consideration for any supply but compensation for breach of contract, and thus not taxable under GST.

Department’s Submissions:
The jurisdictional officer agreed that providing canteen facilities is a statutory obligation and not incidental to the applicant’s business, and opined that such recoveries are not ‘supply’ under Section 7(1). For notice pay recoveries, reliance was placed on CBIC Circular No. 178/10/2022-GST, which clarifies that such amounts are penalties and not consideration for tolerating an act, and hence not taxable.

Court’s Reasoning and Findings:
The Authority for Advance Ruling (AAR) examined the definition of ‘business’ under Section 2(17) of the CGST Act, noting its inclusive nature and the coverage of activities incidental or ancillary to the principal business. The AAR held that providing canteen services to employees, even if statutorily mandated, is incidental or ancillary to the main business activity and thus falls within the definition of ‘business’.

The AAR distinguished between two transactions: (i) supply of canteen services by the third-party provider to the applicant, and (ii) supply by the applicant to its employees. The applicant recovers a portion of the canteen cost from employees, which constitutes consideration for the supply of services. The AAR referred to CBIC Circular No. 172/04/2022-GST, which clarifies that perquisites provided free or at concessional rates as part of the employment contract are not subject to GST. However, only the concession or perquisite portion is exempt; the amount recovered from employees is taxable.

On the issue of notice pay recoveries, the AAR relied on CBIC Circular No. 178/10/2022-GST, which states that such recoveries are penalties for breach of contract and not consideration for any supply or for tolerating an act. Therefore, notice pay recoveries are not taxable under GST.

Decision and Legal Principle:
The AAR ruled that GST is payable on the amount recovered from employees for canteen services, as this constitutes consideration for a supply under Section 7(1) of the CGST Act. However, the perquisite portion (i.e., the part not recovered from employees) is not taxable. No input tax credit (ITC) is available on such supplies. For notice pay recoveries, the AAR held that these are not subject to GST, as they are not consideration for any supply.

Conclusion:
This ruling clarifies the GST treatment of employee-related recoveries: amounts recovered from employees for canteen facilities are taxable, while notice pay recoveries are not. The decision is grounded in statutory interpretation of ‘supply’, ‘business’, and relevant CBIC circulars, providing important guidance for employers on GST compliance regarding employee recoveries.