GST Alert on GST Applicability by Gujarat Authority for Advance Rulings (AAR)

The Gujarat Authority for Advance Rulings (AAR) held that GST applicability does not extend to nominal salary deductions for canteen facilities in factory premises. GST is not levied on such deductions, and Input Tax Credit (ITC) is allowed for costs borne by the assessee/applicant for permanent employee canteen services under the Factories Act. This ruling is also relevant from a broader taxation advisory services perspective for businesses assessing employee-related tax treatment and compliance exposure.

Case of Dormer Tools India P. Ltd. Advance Ruling No. Guj/GAAR/R/2024/12, Application No. Advance Ruling/SGST&CGST/2023/AR/28 dated 30^th May, 2024.

Key Findings on GST Applicability and Canteen Services

The AAR issued the following findings on GST applicability:

Deduction from Salary Not Considered Supply under GST

• The nominal deduction made by the applicant from employee salaries for food provided on factory premises does not constitute a “supply” under Section 7 CGST Act, 2017.
• Therefore, GST applicability does not arise on such deductions, confirming that salary deductions for canteen services are outside GST scope.

Input Tax Credit (ITC) Eligibility for Canteen Services

• Input Tax Credit (ITC) will be available for canteen services GST charged by the service provider for permanent employees in the factory.
• This is supported by Section 17(5)(b) CGST (as amended effective 1.2.2019) and CBIC Circular No. 172/04/2022-GST dated 6.7.2022.
• ITC is limited to the costs borne by the applicant for providing canteen services, excluding any proportion of credit embedded in the cost of goods recovered from employees.

Legal Provisions Supporting GST Applicability Decision

• Section 7 CGST Act defines what constitutes a “supply” under GST.
• Section 17(5)(b) CGST allows ITC on services used for employee welfare, including canteen facilities.
• Gujarat Authority for Advance Rulings (AAR) clarified GST applicability specifically for factory premises canteen services under the Factories Act, 1948, and Gujarat Factory Rules, 1963.

This ruling confirms that GST applicability for salary deductions is exempt and Input Tax Credit (ITC) can be claimed only for the employer-borne cost of canteen services.

Additional Resources

• Supreme Court considered secondment of employees to Indian entity by an overseas group entity as taxable service
• Delhi HC quashed show cause notices demanding GST on secondment of employees
• GST input tax credit rules and ITC claiming strategies
• Goods service tax GST litigation