Input Tax Credit in a nutshell dictates how, at the time of paying taxes on output, you can pay a lesser amount if you have already paid some taxes on input. Where we talk about input and output, concepts of supply and delivery come into the discussion. By definition, supply encompasses all forms of supply of goods or services or both. These include sale, transfer, barter, exchange, license, rental, lease or disposal. Supply has to be agreed upon by a person or persons in the course of conducting business. Having said this, the question arises: What about ITC on canteen services? Canteen services are supplementary to the running of a business. Moreover, the GST law considerations for food and beverages are a tad bit confusing.
There needs to be some discussion on the applicability of ITC on canteen services. There are doubts about the proper classification of canteen services, the rates, and input tax credit.

Classifying the supply of food and beverages under canteen services

Foods and beverages, because of their tangible nature, are technically classified as goods. But a canteen operator supplies food and beverages from a place of business, in exchange of monetarty compensation. That makes it a service. But confusions with respect to food and beverages persist, because the term has not been well defined under GST law.
Schedule-II classifies supply of food and beverages as a service in certain cases where supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any beverage (other than alcoholic liquor), is for cash, deferred payment or other valuable consideration. To put it in another way, if food and beverages are supplied as a part of service for consideration, the activity shall be termed as service. If the food and beverages are supplied as a part of service without consideration, then the same shall not amount to service.

Considerations for Restaurant Services

The rate notification No. 11/2017-CGST(R), as amended by Notification No. 20/2019-CGST(R), wef 01.10.2019 defines restaurant service and outdoor catering as:
“(xxxii) ‘Restaurant service’ means supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied.”
“(xxxiii) ’Outdoor catering’ means supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, at Exhibition Halls, Events, Conferences, Marriage Halls and other outdoor or indoor functions that are event based and occasional in nature.”
The GST rate for food (CH 2106), beverages (CH 2202) are defined in Notification No. 1/2017-CGST (R). Most of the food and beverages processes (like preparation,storage etc.) are liable for 18% GST rate. GST rate for restaurant service and catering service is provided in Notification No. 11/2017-CGST (R). The rate for the same is 5% subject to the condition that ITC shall not be availed.

ITC Restrictions Apply On Food and Beverages / Outdoor catering, but not on Restaurant Services

Section 17(5) imposes restrictions on claiming input tax credit on food and beverages, and outdoor catering. Being a non-obstante clause (notwithstanding anything contained), it overrides the input credit provisions of section 16(1) and 18(1). Section 17(5) dictates that ITC shall not be available w.r.t food and beverages, outdoor catering etc.
Additionally, the Section 17(5) provision also specifies that claiming ITC on food and beverages is permissible if the outward taxable supply (zero-rate GST) is also in the same category, or the same are used as an element in the taxable outward supply, being composite supply or mixed supply.
As is now evident, the ITC restriction under section 17(5) is on the supply of food and beverages and outdoor catering only, not on restaurant services. ITC is allowed only if food and beverages supply is part of another taxable outward supply. For example, if food and beverages supply is part of an accommodation service, ITC is allowed.

Canteen Facility At Corporate Offices: Service or not?

As per Schedule-III, services by an employee to the employer in course of or in relation to his employment is neither supply of services nor supply of goods. However, In the above case, service is provided by employer not by employee & also it is outside the ambit of employment. Therefore, such transaction is not covered under schedule III & It shall be treated as supply.
Note: Taxable value for the purpose of GST will be the open market value of such services.
In simple words, company is providing services to employees for a consideration in the course or furtherance of business and it fall under the definition of supply. Therefore, it will create tax liability on the company.

ITC on Canteen Services – Eligibility for Employers

Company provide canteen facility to its employees as per Factories Act, 1948. Section 46 stipulates that any factory employing more than 250 workers is required to provide canteen facility to its employees. Since this is mandatory, ITC of canteen services provided to employees should be available in view of proviso to section 17(5)(h) of CGST Act. This clause is inserted vide CGST (Amendments) Act, 2018 w.e.f. 01-02-2019.
There could also be cases where partial amounts recovered from the employees towards the canteen facility which requires payment of GST by the employer / registered persons. In such cases, in terms of notification no.11/2017-CT, GST rate of 5% would be applicable and no other rate can be applied. Once 5% rate is applied, the same is subject to condition that no ITC on goods or services is claimed. Therefore, no ITC would be eligible where amounts are being recovered from the employees. Further, considering that the employer and employees are “related persons” under GST, the employer may be liable to pay GST on open market value of food supplies provided to employees, even when a nominal amount is recovered from the employees. This again depends on the terms of employment.
Tax payers could undertake cost benefit analysis considering the eligibility of credits in case of canteen recovery. If no amounts are recovered, credit of 5% would be eligible. If amounts are recovered, cost would be 10% [5% charged by caterer + 5% liability to be discharged by employer]. If amounts recovered are less than 10%, then option of not recovering any amounts from employee could be better. The canteen services provided to the employees free of cost could be included in the employment contract.