GST Council: From canteen to medical insurance, GST Council delivers long-awaited relief on employee benefits

At the last meeting, the GST Council promised to provide clarification regarding various Input Tax Credit (ITC) issues under the GST. Delivering on its promise, the CBIC issued a circular clarifying various ITC-related issues with respect to perquisites provided by employers to their employees and the leasing of assets.

The GST Act was amended on February 1, 2019 to allow TIC on goods and services that were compulsorily provided under any law by an employer to its employees. Typically, an employer provides various services to an employee, such as canteen service, medical insurance, transportation service, preferential trips, etc. These services are provided free of charge or at nominal cost. Moreover, most of these services are provided as a mandatory obligation by an employer. The appealing authority for advance rulings in Musashi Auto Parts Pvt. ltd. argued that the amendment will have only limited applicability and that ITC on travel benefits granted to an employee will not be permitted.

Based on this decision, the ITC on the canteen service was refused even when provided as a mandatory obligation by an employer. The analogy of this decision would also cause the ITC to deny medical insurance, transportation service, etc. This was never the intention of the legislation. CBIC has now clarified that the amendment has wider applicability and that ITC is available on canteen service, medical insurance, transportation service and other services where the same is mandatorily provided under of any law. This is a welcome clarification that will reduce tax costs for industry as well as employees (where GST was collected separately from employees).

Perquisites granted by an employer to its employees always attract the attention of the tax authorities. The service provided by an employee to an employer is exempt from the GST. The legislature never intended to cover tax benefits granted to an employee, such as free food, transport, medical insurance, etc., when these were granted as part of an obligation contractual. An employee is covered by the definition of “related person” under the GST. The law levies GST on the “fair market value” when there is a supply between related persons, even if no consideration is charged. There is an industry-wide dispute as to whether the GST applies to a free supply from an employer to an employee who is a related party. To compound the problem, the Advance Ruling Authority in the case of MFAR Hotel & Resorts Pvt. ltd. argued that the supply of free food to an employee is a supply of a service subject to GST since the consideration is not necessarily due to a related party transaction. Thus, there was confusion in law because of the overlapping provisions relating to supplies made to employees.

The recent circular now clarifies that any perquisites provided by an employer to its employees under a contractual agreement stand in lieu of employment and would not incur GST. Thus, any benefit given to an employee as part of human resources policy or normal practice under an employment contract would be outside the scope of the GST when no consideration is charged. This will cover the free provision of food, transport, medical insurance, etc. This clarification will end the dispute over the levying of GST on any free supply of goods and services by an employer to an employee. This will also reduce tax costs for industry as well as employees (where GST has been recovered separately)

In addition, the circular clarifies that ITC on the rental of all assets (other than the rental of motor vehicles, aircraft and vessels) is permitted under GST.

A circular has an explanatory character. It just reiterates what has always been there in law. Thus, the clarifications provided by this circular would apply as soon as the GST comes into force, ie July 1, 2017. The industry is facing GST requests on the above transactions. This circular will help provide certainty for the industry as well as the ministry to arrive at a correct legal position.

Overall, the circular relieves the industry as a whole and would help reduce litigation.

(Saurabh Agarwal, Tax Partner, EY India. With contributions from Gaurav Narula, Tax Director, EY India)

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