Understanding GST on Employee Benefits: Insights from CGST Act's Section 17(5) and Relevant Circulars

Goods and Services Tax (GST) applies to transactions between related parties, even when no payment is involved. Under GST regulations, employers and employees are considered related entities. However, any remuneration an employer provides to an employee during their employment is typically excluded from GST. This distinction has frequently caused uncertainty regarding whether GST should apply to various employee perks and benefits. An employer providing compensation to an employee as part of their employment is outside the purview of GST. This has often led to confusion regarding the taxability of perks and benefits offered to employees. For instance, the tax implications of food, passenger transport, and other benefits provided to staff have been particularly ambiguous.

Input Tax Credit Restrictions for Employee-Related Services Under Section 17(5)

Section 17(5) of the CGST Act specifies certain goods and services on which Input Tax Credit (ITC) is restricted. This includes items used for personal purposes, such as food and beverages, outdoor catering, health services, and the rental, leasing, or hiring of motor vehicles or aircraft, as well as life and health insurance. A registered entity generally cannot claim ITC on these items unless they are part of a composite or mixed supply.

However, ITC can be claimed if the inward and outward supply of goods or services falls under the same category. Furthermore, an exception exists: ITC on these services is available to a company if providing them is a mandatory requirement under any prevailing law.

GST Implications for Providing Benefits to Employees

The definition of "supply" under GST is broad, encompassing all sales, transfers, exchanges, barters, rentals, leases, licenses, or disposals made for consideration and in the furtherance of business. This includes transactions between an employee and an employer. Consequently, any supply made by an employer to an employee is generally subject to GST.

Here are some examples:

• Gifts: Gifts provided by an employer to an employee are exempt from GST if their value does not exceed Rs. 50,000 per year. However, gifts exceeding this threshold are subject to GST.
• Perquisites: Non-cash benefits, or perquisites, supplied by an employer to an employee within the terms of their contractual agreement are not subject to GST.
• Use of Common Facilities: Free common facilities, such as transportation, health club memberships, uniforms, training, canteen services, and journal subscriptions, are not subject to GST if provided as part of the employment contract. Conversely, if such services are not part of the contractual agreement, they become taxable under GST.

Key Advance Rulings and Litigation Concerning Employee Perks

Several cases and advance rulings have addressed the taxability and ITC availability on employee benefits:

1. Outdoor Catering for Employees: Section 17(5) generally restricts ITC on outdoor catering services. However, if an employer provides outdoor catering due to a statutory obligation (e.g., under the Factories Act, 1948), ITC may be claimed. The Gujarat Authority for Advance Ruling (AAR) affirmed that if canteen facilities are provided to employees as per legal requirements, the employer can claim ITC on these services.
2. Transport Service to Employees: Section 17(5) excludes ITC on hiring motor vehicles for passenger transport with a seating capacity of more than 13 persons. Despite this, the Maharashtra AAR ruled that an applicant could claim ITC on GST paid via reverse charge for such services when provided in the course of furthering business operations.

Clarifications on Employee Benefits by Circular 172 of 2022

The Central Board of Indirect Taxes and Customs (CBIC) issued Circular 172 in July 2022 to clarify that GST does not apply to employee perks that form an integral part of their contractual agreement. This aligns with Schedule III of the CGST Act, which explicitly states that services rendered by an employee to an employer during employment are outside the scope of GST.

This means that free food, beverages, canteen facilities, and medical insurance coverage provided according to the employment contract do not attract GST. Circular No. 172/4/2022 further clarified that if an employer provides services to an employee outside the contractual agreement but in compliance with any existing law or rules, ITC can still be claimed on such provisions.