From canteen to medical insurance, the GST Council provides the most awaited services in the field of employment

In the last meeting, the GST Board promised to provide details related to various issues of Input Tax Credit () under GST. In keeping with its promise, the CBIC has issued a document detailing various matters related to ITC related to the provision of ITC by employers to their employees and leasing of assets.

The GST law was amended on 1 February 2019 to allow ITC on goods and services provided under any law by employers to their employees. In many cases, employers provide various services to the employee such as canteen, medical insurance, transportation services, intermediate travel, etc. These services are offered free of charge or at a nominal cost. Also, most of these services are offered as an official position by the employer. The Appellant Authority for Advance Ruling in the case of Musashi Auto Parts Pvt. Ltd. it was believed that the restructuring would have limited employment and ITC on travel expenses paid to the employee would be allowed.

Based on this decision, ITC on canteen service was disallowed even though it was given as a coercion by the employer. A comparison of the decision would also have resulted in the denial of ITC on medical insurance, transport services, etc. This was not the purpose of the legislation. CBIC has now clarified that the amendment applies more broadly and ITC is available on canteen, medical insurance, transport services, and other services where the same is compulsorily payable under any law. This is clear and will reduce the tax burden for both companies and employees (where GST is claimed separately by employees).

The allowances provided by employers to their employees always attract the attention of the tax authorities. Services provided by an employee to an employer are exempt from GST. The Legislature did not consider tax-deductible employee benefits such as free meals, transportation, medical insurance, etc. An employee is covered by the definition of ‘associated person’ under GST. The law levies GST on ‘fair market value’ when there is property between related parties even though no one is paying it. There is considerable industry debate as to whether GST applies to free transfers from an employer to an employee being a related party. In order to amplify the matter, the Authority for Advance Ruling in the case of MFAR Hotel & Resorts Pvt. Ltd. held that the supply of free food to an employee is a service that attracts GST because the consideration is not due to social activities. Therefore, there was confusion in the law due to the combination of provisions for workers.

The latest circular now clarifies that any allowance given by an employer to its employees under a collective agreement is in lieu of employment and will not attract GST. Therefore, any benefit provided to an employee as part of an HR policy, or a work practice under an employment contract would be outside the GST ambit when there is no consideration. This will provide free food, transportation, medical insurance, etc. This clarification will resolve the dispute regarding levy of GST on free supply of goods and services by an employer to an employee. This will also reduce the tax burden on companies and employees (where GST was separately reclaimed).

Further, the circular clarifies that ITC on leasing of all goods (except leasing of cars, aircraft, and ships) is allowable under GST.

The circle is clear in nature. It simply repeats what was always there in the law. Therefore, the explanations provided by the existing circulars will be applicable from the beginning of GST i.e., 1 July 2017. Companies are facing GST questions in the above situations. This circular will help provide assurance to the industry and the department to arrive at the appropriate regulations.

Overall, circulars help all companies and can help reduce litigation.

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

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