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Service Tax On Office Canteen Food

Published on Wed, Apr 17,2013 | 11:24, Updated at Fri, Apr 26 at 12:55Source : 

By: R Muralidharan, PwC India

On the eve of Budget 2013 the Central Board of Excise and Customs has issued a service tax Notification No. 3/2013 on 1 March, 2013 to amend the mega exemption Notification No. 25/2012. The entry 19 of the mega exemption notification which had provided exemption from service tax on services relating to serving of food and beverages by the restaurants, eating-joints or a mess who do not have the facility of air-conditioning/heating or a licence to serve liquor, now stands substituted with a new entry.

As per the substituted entry 19, which comes into effect from 1 April, 2013, the restaurants, eating-joints or mess which do not have the facility of air-conditioning or central heating would qualify for the above exemption. Effectively, this means that the restaurants, eating joints or mess which merely have the air-conditioning/heating facility, irrespective of the fact whether they have the licence to serve liquor or not, would be denied the exemption which was earlier available to non-alcohol serving air-conditioned restaurants.

This article, however, intends to deliberate upon a related issue of taxation of facility of canteen/cafeteria provided by the employer to employees in the office premises. There are multiple arrangements in practice to extend such facilities to the employees and having regard to the current definition of ‘service’ and inclusion of ‘declared services’ under negative list regime, the employers have raised concerns regarding the implication of the above amendment on such arrangements.

In the context of service taxation, the simplest of all would be where the employer permits the third party vendor to set-up a canteen in the office premises who would sell the food directly to the employees. Another simple arrangement would be where the employer allows the third party vendor to serve the food in office canteen and the payment of the entire cost of food is directly made by the employer to the vendor. In these two arrangements the tax compliance would be limited to the third party food supplier who, post 1 April, 2013, would be charging service tax provided the canteen where the food is served to employees has the facility of air-conditioning/heating.

However, in practice there are other models of running an office canteen. The employer with a perspective to have better administrative controls, quality of food or simply to limit the cost of such facility, opt for subsidised food instead of bearing the entire cost of the food. To illustrate, let us assume the cost of one meal that is served in the cafeteria to be INR 100. The employer intends to limit their cost to INR 50 per meal. Accordingly, the employees are offered the same food at a subsidised rate of INR 50. However, to save on the administrative hassles for the third party vendor in collecting half the money from employees and the other half from the employer and not to mention the related invoicing issues, the employer, collects the money to the tune of INR 50 per meal from the employees and pays the full amount of invoice directly to the vendor.

Again there is no doubt about the liability of service tax in relation to services of third party vendor of food. The vendor, subject to the facility of air-conditioning/heating in the office canteen, would be charging service tax on its invoice raised on the employer. As far as the second leg of collection of INR 50 per meal from the employees by the employer is concerned it is simply a cost sharing arrangement between employer and employees, and would merit to be treated as a transaction in money. Simple collection of cash by the employer from the employees and making a consolidated payment to the vendor, by no stretch of imagination could be considered as rendition of services by employer to employees. Canteen facility in any event cannot be seen in isolation of the contract of employment between the employer and employee.

A clarification to this effect by the Central Board of Excise and Customs would impart the much required clarity on this issue to the benefit of the trade and industry.


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