The Factories Act, 1948,, is one of the key legislations governing industrial establishments in India. Among its various provisions aimed at ensuring the welfare, safety, and health of workers, it mandates that factories employing more than 250 workers must provide and maintain a canteen facility for their employees. This requirement is aimed at ensuring that workers have access to hygienic and affordable meals during working hours. The responsibility to provide such a facility lies with the employer, and the law allows flexibility in how it is provided. The employer can set up and manage the canteen on their own or outsource the responsibility to third-party caterers.
In practice, many companies choose to outsource the canteen operations to professional catering service providers. These caterers typically operate within the factory premises and provide meals to employees. In some cases, the employer may subsidize the cost of food, charging employees only a nominal amount for the meals provided. This arrangement is commonly referred to as partial recovery for canteen services.
While the provision of canteen services under the Factories Act is mandatory for certain factories, the issue of whether employers can claim Input Tax Credit (ITC) under the Goods and Services Tax (GST) regime on the expenses incurred for these canteen facilities has been the subject of debate. This question has recently been addressed in various Advance Rulings, including a significant one issued by the Gujarat Authority for Advance Ruling (AAR). In that case, the AAR held that ITC on the GST paid for providing the canteen facility to employees, as mandated under the Factories Act, 1948, is not admissible.
The ruling has sparked discussion because it involves the interpretation of the provisions under the Central Goods and Services Tax (CGST) Act, 2017, particularly Section 16, which governs the eligibility for ITC, and Section 17(5), which specifies certain goods and services on which ITC is blocked. The Gujarat AAR interpreted these provisions to mean that the relevant proviso allowing ITC in cases where certain benefits are mandatory under law applies only to travel benefits and not to food and beverages or outdoor catering.
We will explore the background of the legal provisions, the general rules governing ITC, and the specific context of canteen services under the Factories Act. It will also set the stage for understanding the reasoning behind the Gujarat AAR’s decision and the counterarguments regarding the interpretation of the law.
Understanding Input Tax Credit under GST
The Goods and Services Tax regime in India is designed to eliminate the cascading effect of taxes by allowing registered taxpayers to claim credit for the tax they pay on inputs used for business purposes. This mechanism, called Input Tax Credit (ITC), enables a registered person to offset the GST paid on goods and services used in the course or furtherance of business against the GST liability on their outward supplies.
Section 16 of the CGST Act, 20,17, provides the basic eligibility criteria for availing ITC. It states that a registered person shall be entitled to take credit of the input tax charged on any supply of goods or services or both, which are used or intended to be used in the course or furtherance of business. This credit can be used to pay the output tax liability, subject to certain conditions and restrictions provided in the Act and the rules made thereunder.
While Section 16 establishes the broad principle that ITC is available for business-related expenses, Section 17 introduces apportionment rules and restrictions. One of the most important subsections in this regard is Section 17(5), which enumerates certain categories of goods and services on which ITC is not admissible, commonly referred to as blocked credits. The list includes items such as food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of clubs, and travel benefits provided to employees on vacation, among others.
The reasoning behind blocking ITC on certain goods and services is to prevent misuse and ensure that credit is not claimed on expenses that are personal or do not have a direct nexus with the taxable outward supplies of the business. However, the law does provide exceptions in certain cases, particularly where the provision of such goods or services is obligatory under any law for the time being in force.
The Role of Section 17(5) in ITC Eligibility
Section 17(5)(b) of the CGST Act is directly relevant to the question of ITC on canteen facilities. This section provides that ITC shall not be available in respect of the supply of goods or services such as food and beverages, outdoor catering, and certain other items, unless they are used for making an outward taxable supply of the same category or as part of a composite or mixed supply. The clause also includes a proviso which states that ITC shall be available where the provision of such goods or services is obligatory for an employer to provide to its employees under any law in force.
The language of this proviso and its placement within the section have given rise to interpretational issues. One school of thought is that the proviso applies only to sub-clause (iii) of Section 17(5)(b), which deals with travel benefits extended to employees on vacation. The Gujarat AAR has taken this view, thereby excluding canteen facilities from the scope of the proviso. Another interpretation, however, is that the proviso applies to all sub-clauses under Section 17(5)(b), including those relating to food and beverages.
If the broader interpretation is accepted, then ITC should be admissible for canteen services where the provision of such services is mandated by law, as is the case under the Factories Act, 194,8, for factories employing more than 250 workers. This interpretation aligns with the principle that expenses incurred to comply with statutory requirements are part of the costs incurred in the course of business.
The Factories Act and the Canteen Requirement
The Factories Act, 19,48 is a welfare legislation aimed at protecting the rights and ensuring the well-being of workers in manufacturing units. Section 46 of the Act deals with the provision of canteens. It mandates that the State Government may make rules requiring that in any specified factory where more than 250 workers are ordinarily employed, a canteen or canteens shall be provided and maintained by the occupier for the use of the workers.
The rules made under this section typically specify the standards for the construction, location, and hygiene of the canteen, as well as the nature of the food to be provided, the manner in which prices are to be fixed, and the arrangements for managing the facility. The cost of establishing and maintaining the canteen is generally borne by the employer, although employees may be required to pay a subsidized amount for the food.
The obligation to provide a canteen is not optional for the employer; it is a statutory requirement. Failure to comply with this obligation can result in penalties under the Factories Act. Given that the provision of a canteen is a legal requirement, it is part of the employer’s business obligations and arguably falls within the scope of expenses incurred in the course or furtherance of business under Section 16 of the CGST Act.
The Gujarat AAR Ruling on Canteen Facility ITC
The Gujarat Authority for Advance Ruling (AAR) considered a case where the applicant, a registered person under GST, was providing canteen facilities to its employees through an outsourced catering service, in compliance with the Factories Act, 1948. The employer recovered a nominal portion of the cost from employees while bearing the majority of the expense. The applicant sought clarity on whether ITC could be claimed on the GST charged by the caterer for providing these services.
The AAR examined Section 17(5)(b) of the CGST Act, which specifies the categories of goods and services for which ITC is blocked. It noted that food and beverages, outdoor catering, and similar services fall under sub-clause (i) of this provision. The clause does provide exceptions in cases where such goods or services are used for making outward taxable supplies of the same category or as part of a composite or mixed supply. However, the applicant was not using the canteen services for making outward supplies of the same category. Instead, the facility was provided for the benefit of employees, which raised the question of whether the statutory obligation under the Factories Act could override the ITC restriction.
The applicant argued that the proviso following sub-clause (iii) of Section 17(5)(b) should be read as applying to all sub-clauses, including sub-clause (i). This would mean that if the provision of canteen services is obligatory under the Factories Act, ITC should be allowed. The AAR, however, did not accept this reasoning. It held that the proviso after sub-clause (iii) is linked only to travel benefits to employees, as mentioned in sub-clause (iii), and not to the other categories, such as food and beverages, in sub-clause (i).
The AAR pointed to the punctuation and formatting of the provision to support its view. It noted that sub-clause (i) ends with a colon and is followed by its proviso, which in turn ends with a semicolon. According to the AAR, this indicates that the proviso to sub-clause (iii) is independent and cannot be extended to apply to sub-clause (i). Therefore, the ITC on canteen services provided to employees, even when mandated by the Factories Act, was deemed inadmissible.
The Significance of the Punctuation-Based Interpretation
The AAR’s interpretation relied heavily on the structural layout and punctuation of Section 17(5)(b). The placement of colons, semicolons, and provisos in legislation can sometimes influence how provisions are read. In this case, the AAR treated each sub-clause as a separate unit, with any attached proviso applying only to that specific sub-clause. This reading led to the conclusion that the special allowance for obligatory provisions under law, stated after sub-clause (iii), was intended only for travel benefits and not for food and beverages or outdoor catering.
Such an interpretation creates a narrow scope for the statutory obligation exception, effectively excluding situations where employers are compelled by law to provide food services to employees. This has implications for many businesses, especially in the manufacturing sector, where canteen facilities are a standard statutory requirement.
Critics of this approach argue that legislative provisions should be interpreted in a manner that furthers their underlying purpose and avoids unjust results. They contend that focusing solely on punctuation without considering the broader legislative intent can lead to interpretations that are inconsistent with the objectives of the GST framework.
Legislative Intent Behind the Proviso
The broader context of the GST law and its amendments provides insight into the intended scope of the statutory obligation exception. During the 28th GST Council meeting, it was acknowledged that certain services, such as food and beverages, health services, and travel benefits, are sometimes required to be provided by employers under various laws. The discussion indicated that ITC restrictions in such cases were imposing additional burdens on businesses and that the law should be amended to allow ITC where such provisions are obligatory.
Following this, the CGST Amendment Act, 2018,, introduced changes to Section 17(5) to permit ITC for goods and services provided under legal obligation. This suggests that the legislative intent was to create a uniform principle that applies across all sub-clauses of Section 17(5)(b), not just travel benefits. The use of the words “such goods or services or both” in the proviso indicates an intention to cover both goods and services, further supporting the argument for a broader application.
The placement of the proviso after sub-clause (iii) may have been a drafting choice rather than an indication of limited applicability. Legal drafting often uses indentation and structural markers for readability, but these should not override the substantive interpretation when the wording and context suggest a wider scope.
Expenses Incurred in the Course of Business
Another key point in the debate is whether the provision of canteen services mandated by the Factories Act qualifies as an expense incurred “in the course or furtherance of business” under Section 16 of the CGST Act. Judicial precedents, including decisions of the Supreme Court, have held that business expenses include those necessary to comply with statutory obligations. Measures taken to preserve business operations, protect assets, or meet legal requirements are considered part of the business process.
By this reasoning, the cost of providing a canteen facility in compliance with the Factories Act is a business expense. Since ITC is intended to reduce the tax burden on business-related expenses, disallowing ITC in such cases can be seen as contrary to the GST principle of avoiding cascading taxes. This perspective strengthens the argument that the statutory obligation exception should apply to canteen services.
Counterarguments to the Gujarat AAR Decision
The interpretation adopted by the Gujarat Authority for Advance Ruling has been contested on several grounds. One of the primary counterarguments is that the proviso following sub-clause (iii) of Section 17(5)(b) should be read as applicable to all sub-clauses within that section, including sub-clause (i) relating to food and beverages and outdoor catering. This interpretation is supported by the use of the phrase “such goods or services or both” in the proviso, which does not limit its application to only travel benefits.
The reasoning is that the legislative intent behind the amendment to Section 17(5) was to allow ITC on goods and services which an employer is obligated to provide under any law to employees, irrespective of the category under which these goods or services fall. Since the Factories Act mandates the provision of canteen services, the employer’s expenses on such services should qualify for ITC.
Furthermore, it has been pointed out that relying solely on punctuation and formatting to restrict the application of the proviso leads to an unreasonable and restrictive interpretation. Legal interpretation principles emphasize reading the statute as a whole and giving effect to every word. Ignoring the broader context and purpose of the proviso undermines the GST law’s objective of avoiding tax cascading and ensuring neutrality.
Clarifications by the National Academy of Customs, Indirect Taxes and Narcotics
The National Academy of Customs, Indirect Taxes and Narcotics (NACIN), which is the premier training institution for indirect tax officials, has issued clarifications on this subject. NACIN’s guidance supports the view that ITC would be allowed on food and beverages, health services, travel benefits to employees, and similar goods and services if their provision is obligatory under any law.
This clarification aligns with the amended provisions of Section 17(5), indicating that the statutory obligation exception is not confined to travel benefits but applies broadly to all categories of blocked credits listed in Section 17(5)(b). Such official interpretations by tax authorities carry persuasive value and help in aligning tax administration practices with legislative intent.
Precedents from the CENVAT Credit Regime
A review of the erstwhile CENVAT Credit rules and judicial decisions under the previous indirect tax regime offers additional insights. Under CENVAT, certain input services were blocked from credit, but exceptions were made where these services were mandated by law to be provided to employees. The wording in the CENVAT definitions distinguished between inputs and input services, and the statutory obligation exception covered a wider range of benefits, including food and catering services.
These precedents suggest that the GST legislature intended to continue a similar approach, ensuring that statutory obligations do not become a source of blocked credits and undue tax costs. Ignoring these precedents may result in inconsistent tax treatment and increased compliance difficulties for businesses.
Principles of Statutory Interpretation in Tax Law
Tax laws are generally interpreted in a manner that advances the legislative purpose and provides relief to taxpayers unless the language of the statute explicitly excludes such relief. Ambiguities in tax statutes are often resolved in favour of the taxpayer under the principle of in dubio pro tributario.
Applying this principle to the issue of ITC on statutory canteen facilities suggests that the proviso should be construed broadly to allow credit, given that the provision of such facilities is a legal obligation and a necessary business expense. The narrow interpretation adopted by the Gujarat AAR, which limits the proviso only to travel benefits, appears to conflict with this principle and may impose unintended hardships on taxpayers.
Moreover, the overall objective of the GST system is to eliminate tax cascading and ensure that tax costs do not accumulate unnecessarily in the production and distribution chain. Denying ITC on mandatory canteen services results in embedded tax costs, which ultimately burden the employer and may affect pricing and competitiveness.
Implications for Employers and Businesses
The decision by the Gujarat AAR, if followed widely, could have significant financial implications for employers who maintain statutory canteen facilities. The inability to claim ITC on GST paid on such services increases the effective cost of compliance and may reduce the benefits of the GST credit mechanism.
Employers may have to reconsider their approach to providing canteen services or bear increased costs, which could be passed on to employees or customers. This may also discourage the provision of adequate welfare facilities in workplaces, contrary to the welfare objectives of labour laws.
Given the conflicting interpretations, it is likely that the issue will require further clarification from higher judicial authorities or the GST Council to ensure uniformity and certainty in tax administration.
Summary of Key Points
The provision of canteen facilities in factories employing more than 250 workers is a statutory obligation under the Factories Act, 1948. The expenses incurred by employers for maintaining or outsourcing these canteen services are essential business costs intended to comply with legal requirements aimed at worker welfare.
Under the Goods and Services Tax (GST) framework, Input Tax Credit (ITC) is generally allowed on goods and services used in the course or furtherance of business, as per Section 16 of the CGST Act, 2017. However, Section 17(5)(b) blocks ITC on certain categories of goods and services, including food and beverages and outdoor catering. This block is subject to exceptions when such supplies are used in making outward taxable supplies of the same category or when mandated by law.
The Gujarat Authority for Advance Ruling (AAR) ruled that the proviso allowing ITC on goods or services provided under legal obligation applies only to travel benefits extended to employees and not to food and beverages or canteen services. The AAR’s conclusion was largely based on the grammatical and structural interpretation of Section 17(5)(b), specifically the punctuation and positioning of the proviso.
Counterarguments and clarifications from official tax authorities such as NACIN suggest that the proviso is intended to apply broadly across all categories listed in Section 17(5)(b), including food and beverages. Judicial precedents under previous indirect tax regimes also support the availability of credit on statutory obligations like canteen services. Principles of statutory interpretation in tax law emphasize construing ambiguous provisions in favor of taxpayers, which further supports the claim of ITC on canteen expenses mandated under law.
Possible Future Developments
Given the conflicting interpretations and the significant impact on businesses, it is likely that further clarifications will emerge. These may come in the form of notifications, circulars, or clarifications issued by the GST Council or the Central Board of Indirect Taxes and Customs (CBIC). Higher judicial forums may also adjudicate on the matter, providing authoritative guidance.
Stakeholders, including industry bodies and tax professionals, may seek legislative amendments or clarifications to explicitly include statutory canteen facilities within the scope of the ITC exception. This would help eliminate ambiguity and provide uniformity in compliance and tax treatment.
Practical Considerations for Businesses
In light of the current uncertainty, businesses should carefully assess their canteen-related expenses and the GST paid on such services. While some may choose to claim ITC based on the broader interpretation supported by NACIN and legal precedents, others may adopt a conservative approach to avoid disputes with tax authorities.
Maintaining detailed documentation, including copies of legal mandates, contracts with caterers, GST invoices, and records of partial recoveries from employees, is essential. This documentation will support the claim of ITC and demonstrate that the services are provided in compliance with statutory obligations.
Businesses should also monitor updates from tax authorities and seek professional advice tailored to their specific circumstances to navigate the evolving legal landscape effectively.
Conclusion
The admissibility of Input Tax Credit on canteen facilities mandated under the Factories Act remains a subject of legal and interpretational debate. The GST law provides a general framework allowing ITC on business inputs but restricts credit on certain services, with exceptions for those legally mandated.
While the Gujarat AAR ruled against the availability of ITC on statutory canteen services, compelling legal reasoning and authoritative clarifications suggest that such credit should be allowed. The broader intent of the GST law to reduce tax cascading and promote ease of doing business supports this view.
Until definitive judicial or legislative clarifications are issued, businesses should carefully evaluate their position and maintain robust compliance records. The evolving nature of this issue highlights the importance of staying informed and adaptable in tax matters related to statutory employee welfare provisions.