Factory Canteens Get GST Relief: Credit Allowed for Legally Mandated Employee Meals

The Hon'ble Authority for Advance Ruling, Gujarat in Amneal Pharmaceuticals (P.) Ltd., In re (GUJ/GAAR/R/2025/07, Advance Ruling/SGST & CGST/2024/AR/21, decided on March 21, 2025) held that where canteen facility is provided by an applicant at its factory in compliance with the mandate under Factories Act, 1948, input tax credit will be available to the applicant on GST charged by the service provider in respect of canteen facility provided to direct employees working in the factory. However, ITC on the above will be restricted to the extent of cost borne by the applicant for providing canteen services to its direct employees, but disallowing proportionate credit to the extent embedded in cost of goods recovered from such employees.

Facts of the Case

The Applicant, M/s. Amneal Pharmaceuticals Private Limited, is a pharmaceutical manufacturer and exporter registered under GST with GSTIN 24AAGCA0781K1ZP. The Applicant employs more than 250 employees at its factory premises in Bavla and is also registered under the Factories Act, 1948.

As per Section 46 of the Factories Act, 1948, read with Rule 72 of Gujarat Factories Rules, 1963, the Applicant is mandated to provide and maintain a canteen for its employees. To comply with this statutory requirement, the Applicant provides canteen facilities at its factory.

The Applicant has entered into an agreement with a canteen service provider (CSP) for provision of canteen facilities to its employees. Under this agreement:

• The CSP prepares food for employees at the factory premises and serves the same

• The CSP raises invoices along with applicable GST for its canteen services

• The invoices are based on the consumption of dishes served to employees availing the canteen facility

• The employees bear proportionate canteen charges while the remaining charges are borne by the Applicant

• The amount collected from employees is without any commercial objective or profit margin and is remitted to the CSP

The Applicant contended that pursuant to the amendment to Section 17(5)(b) of the CGST

Act, 2017, effective from February 1, 2019, and CBIC Circular No. 172/04/2022-GST dated July 6, 2022, the proviso at the end of clause (b) of sub-section (5) of Section 17 is applicable to the entire clause (b).

The Applicant argued that on a conjoint reading of the provisions of the Factories Act, 1948, the proviso to Section 17(5)(b) of the CGST Act, 2017, and Circular 172 issued thereunder, they are eligible for ITC pertaining to invoices raised by the canteen service provider to the extent of expenses borne by them.

The Applicant placed reliance on the following case laws/rulings:

• M/s. AIA Engineering Limited, GUJ/GAAR/R/2023/12 dated March 31, 2023

• M/s. Dormer Tools India Private Ltd, GUJ/GAAR/R/2024/12 dated May 30, 2024

Issue

Whether the Company is eligible to take the input tax credit for the GST charged by the canteen service provider for the canteen services (on the portion which is borne by the company) for its employees where the canteen facility is mandatory in terms of Section 46 of the Factories Act, 1948 read with Rule 72 of Gujarat Factories Rules, 1963?

Held by the Authority

The Hon'ble Authority for Advance Ruling, Gujarat in GUJ/GAAR/R/2025/07 held that:

1. The Authority observed that Section 17(5)(b) of the CGST Act, 2017 was amended on February 1, 2019, and the proviso after sub-clause (iii) of clause (b) of Section 17(5) of the CGST Act, 2017 is applicable to the whole of clause (b) of Section 17(5).

2. The Authority noted that the CBIC Circular No. 172/04/2022-GST clarifies that the proviso after sub-clause (iii) of clause (b) of sub-section (5) of Section 17 of the CGST Act is applicable to the entire clause (b).

3. The Authority referenced the GST Council's 28th meeting, which indicated that the scope of input tax credit was being widened and would be made available for goods or services which are obligatory for an employer to provide to its employees under any law for the time being in force.

4. The Authority held that Input Tax Credit will be available to the Applicant in respect of food and beverages as canteen facility is obligatorily to be provided under the Factories Act, 1948, read with Gujarat Factories Rules, 1963, as far as provision of canteen service for employees working at the factory is concerned.

5. The Authority specifically ruled that the ITC on GST charged by the canteen service provider will be restricted to the extent of cost borne by the Applicant only, disallowing proportionate credit to the extent embedded in the cost of goods recovered from such employees.

6. The Authority substantiated its view by referring to the Ruling of the Gujarat Appellate Authority for Advance Ruling order No. GUJ/GAAAR/Appeal/2022/23 dated December 22, 2022 in the case of M/s. Tata Motors Ltd, Ahmedabad.

Analysis and Implications

This ruling has significant implications for manufacturers and employers who are statutorily required to provide canteen facilities to their employees:

1. Eligibility for ITC on Mandatory Services: The ruling clarifies that when canteen facilities are provided pursuant to statutory obligations under the Factories Act, such services qualify for input tax credit despite being generally blocked under Section 17(5)(b).

   
   

2. Partial ITC Allowance: The Authority has adopted a balanced approach by allowing ITC only to the extent of costs borne by the employer, thus preventing any undue benefit for the portion recovered from employees.

   
   

3. Interpretation of Proviso: The ruling confirms that the proviso to Section 17(5)(b) applies to the entire clause (b) and not just to sub-clause (iii), thereby widening the scope of eligible ITC for statutory obligations.

   
   

4. Cost Allocation Methodology: Organizations will need to maintain proper cost allocation records to segregate the employer-borne portion from the employee contribution to accurately claim ITC.

   
   

5. Statutory Compliance Benefit: This ruling provides relief to manufacturers with large workforces who are required by law to provide canteen facilities, allowing them to recover GST costs on such mandatory services.

   
   

6. Documentation Requirements: Companies will need to maintain clear documentation showing:

   • The statutory requirement to provide canteen facilities

   • Agreement with canteen service providers

   • Cost allocation between employer and employees

   • Invoices showing GST charged by service providers

   • Records of employee contributions

     
     

7. Sector-Specific Impact: This ruling particularly benefits manufacturing units with more than 250 employees, as they are mandatorily required to provide canteen facilities under the Factories Act.

Relevant Sections

"Section 17(5)(b) of Central Goods and Services Tax Act, 2017" - "Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:- (b) the following supply of goods or services or both- (i) food and beverages... Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force."

"Section 46 of the Factories Act, 1948" - This section mandates the provision of canteen facilities in factories employing more than 250 workers, establishing the legal obligation that triggers the availability of ITC under the proviso to Section 17(5)(b).

"Rule 72 of Gujarat Factories Rules, 1963" - This rule provides specific requirements for canteen facilities in factories, further establishing the statutory obligation for manufacturers in Gujarat.

"CBIC Circular No. 172/04/2022-GST dated July 6, 2022" - This circular clarifies that the proviso after sub-clause (iii) of clause (b) of sub-section (5) of Section 17 of the CGST Act is applicable to the whole of clause (b), thereby widening the scope of eligible ITC.

Pari Materia / Cases Referred

1. M/s. Tata Motors Ltd, Ahmedabad - Gujarat Appellate Authority for Advance Ruling order No. GUJ/GAAAR/Appeal/2022/23 dated December 22, 2022 - Cited by the Authority as substantiating the view that ITC is available for mandatory canteen facilities with proportionate restriction.

2. M/s. AIA Engineering Limited - GUJ/GAAR/R/2023/12 dated March 31, 2023 - Relied upon by the Applicant regarding ITC eligibility for statutory obligations.

3. M/s. Dormer Tools India Private Ltd - GUJ/GAAR/R/2024/12 dated May 30, 2024 - Relied upon by the Applicant in support of their position on ITC availability.

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