GST Council: From canteen to medical insurance, GST Council provides much-awaited relief to employee benefits

In the last meeting, the GST Council promised to issue clarifications related to various issues related to input tax credit () under GST. Keeping its promise, the CBIC issued a circular clarifying various issues related to ITC in respect of benefits provided by employers to their employees and leasing of assets.

The GST Act was amended on 1 February 2019 to allow ITC on goods and services which were compulsorily supplied under any law by an employer to its employees. Usually, the employer provides various services to an employee, such as canteen service, medical insurance, transportation services, preferential travel, etc. These services are provided either free of charge or at a nominal cost. Moreover, most of these services are provided as a mandatory obligation by the employer. The preliminary ruling appellate authority in the case of Musashi Auto Parts Pvt. Ltd. decided that the amendment would have only limited applicability and ITC on traveling allowances provided to an employee would only be allowed.

Based on this decision, ITC for canteen service was disallowed even when it was provided as a mandatory obligation by an employer. The analogy of this decision would also lead to denial of ITC for medical insurance, transport services etc. That was never the intent of the legislation. The CBIC has now clarified that the amendment has wider applicability and ITC is available for canteen services, medical insurance, transport services and other services where the same is compulsorily provided under any law. This is a welcome clarification and will reduce the tax cost to industry as well as employees (where GST is recovered separately from employees).

The benefits provided by the employer to its employees always attract the attention of the tax authorities. Service provided by an employee to an employer is exempt from GST. The legislature never intended to cover tax benefits provided to an employee such as free food, transport, medical insurance etc. when the same was provided as part of a contractual obligation. An employee falls within the definition of ‘connected person’ under GST. The Act levies GST on “fair market value” where there is a supply between related parties, even if no consideration is charged. There is an industry-wide dispute as to whether GST applies to free supplies from an employer to an employee who is a related person. To compound the problem, the Adjudication Authority in the case of MFAR Hotel & Resorts Pvt. Ltd. considers the supply of free food to an employee to be a supply of service that attracts GST because the consideration is not necessarily attributable to a related party transaction. Thus, there was confusion in the legislation due to overlapping provisions relating to supplies made to employees.

The recent circular now clarifies that any benefit provided by an employer to its employees under a contractual arrangement is in lieu of employment and will not attract GST. Thus, any benefit provided to an employee as part of HR policy or normal practice under a contract of employment would be outside the scope of GST where no remuneration is charged. This will cover the supply of free food, transportation, medical insurance, etc. This clarification will put an end to the dispute regarding the GST levy on any free supply of goods and services from an employer to an employee. This will also reduce the tax cost to the industry as well as employees (where GST is recovered separately)

The circular further clarifies that ITC on leasing of all assets (other than leasing of motor vehicles, aircraft and vessels) is allowed under GST.

The circular has an explanatory nature. It only repeats what has always existed in the law. Thus, the clarifications provided by this circular will be applicable from the commencement of GST viz. July 1, 2017 The industry is facing queries regarding GST on the above transactions. This circular will help in providing certainty to the industry as well as the department to arrive at a correct position of law.

Overall, the circular provides relief to the industry as a whole and would help reduce litigation.

(Saurab Agarwal, Tax Partner, EY India. Featuring Gaurav Narula, Tax Director, EY India)

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