GST on Employee Recoveries: Canteen, Transport, Notice Pay

GST on Employee Recoveries explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

Schedule III paragraph 1 puts services by an employee to the employer, in the course of or in relation to employment, outside the scope of supply. That direction is clear.

The reverse direction — employer to employee — is not in Schedule III. And where the employer recovers part of a cost from the employee, money moves, which looks like consideration.

Circular No. 172/04/2022-GST dated 06.07.2022 resolved the main question. It did not resolve all of them.

Perquisites provided by an employer to an employee in terms of the contract of employment are not liable to GST — they are part of the employment relationship, and the circular treats them as covered by the Schedule III exclusion read as a whole. Recoveries need a further step: where a nominal amount is recovered as part of the employment arrangement, the ICAI and departmental position is that no separate supply arises. Where the employer supplies something outside the employment contract for a real price, it is a supply like any other.

What Circular 172 said

The circular addressed several issues at once. On perquisites, it recorded that:

• Schedule III paragraph 1 excludes services by an employee to the employer in the course of employment;
• perquisites provided by the employer in terms of the contract of employment form part of the employment contract and are therefore in lieu of services by the employee;
• accordingly, perquisites provided under the contract of employment are not subject to GST.

The key phrase is "in terms of the contract of employment". That is the qualifying condition and the boundary.

Where each recovery lands

Canteen recovery. Where the employer provides subsidised food under the employment contract or under a statutory obligation such as s.46 of the Factories Act, 1948, and recovers a nominal amount from wages, the prevailing position is that no GST arises on the recovery. The employer's own input tax credit on the canteen contractor's invoice is a separate question, governed by the proviso to s.17(5)(b) — credit is available where provision of that facility is obligatory under any law.

Transport recovery. The same analysis. Employee transport provided under the employment arrangement, with a nominal recovery, is not a separate supply. Credit on the transport service follows s.17(5)(b) and the seating-capacity threshold for motor vehicles.

Notice pay recovery. Not taxable. The employment contract itself provides for the alternative of serving notice or paying in lieu; the amount recovered is an incident of the employment relationship, which Schedule III places outside supply. Departments argued for years that this was "tolerating an act" under Schedule II paragraph 5(e), and Circular No. 178/10/2022-GST rejected the reasoning. Liquidated damages and tolerating an act →

Insurance premium recovery for dependants. Where the employer's group policy covers employees under the employment contract and dependants at the employee's cost, the dependant portion sits outside the employment contract on its face. This is a genuinely contested area and turns on how the policy and the HR terms are written.

Telephone or internet reimbursement caps. Recovery of the excess above a contractual cap is an incident of the employment arrangement.

Sale of a used company car to an employee. Taxable. This is not a perquisite under the contract of employment; it is a disposal of a business asset, caught by Schedule II paragraph 4(a). Employees are also related persons, so Rule 28 valuation applies.

Gifts. Schedule I paragraph 2 excludes gifts by an employer to an employee not exceeding ₹50,000 in value in a financial year. Above that threshold, the gift is a supply without consideration and is taxable. Supplies to related persons →

The three questions to ask on any recovery

1. Is it provided under the contract of employment? If the employment terms, HR policy or a statutory obligation require it, Circular 172 applies. If it is an ad hoc arrangement, it does not.

2. Is the employer supplying, or merely recovering a cost? An employer that buys a canteen service and recovers part of the cost is not carrying on a canteen business. An employer that runs a staff shop selling goods to employees at a margin is making supplies.

3. Is the amount nominal or commercial? A nominal recovery supports the employment characterisation. A market-rate charge undermines it.

None of the three is conclusive alone. Together they usually settle the answer.

Documentation that supports the position

• Employment contracts and HR policy expressly listing the facility and the recovery.
• Where relied on, the statutory obligation — the Factories Act canteen requirement, or a State rule.
• Payroll records showing the recovery as a deduction from salary rather than as a sale.
• No tax invoice issued to the employee for facilities treated as perquisites — issuing one contradicts the position.
• A note on the ITC treatment under s.17(5)(b), which is the mirror question and is often where an audit starts.

Key takeaways

• Schedule III paragraph 1 excludes employee-to-employer services.
• Circular No. 172/04/2022-GST: perquisites under the contract of employment are not liable to GST.
• Canteen, transport and notice pay recoveries made under the employment arrangement do not attract GST.
• Sale of assets to employees is taxable, and Rule 28 applies because employees are related persons.
• Gifts above ₹50,000 per employee per financial year are a Schedule I supply.
• The employer's ITC on these facilities is a separate question under s.17(5)(b).

Read next

• Schedule III: Activities Neither Goods Nor Services
• Liquidated Damages and "Agreeing to Tolerate an Act"
• Supplies to Related Persons: Schedule I and Rule 28
• Blocked ITC Under Section 17(5)

Disclaimer: Positions stated as on 5 September 2026, based on ICAI Background Material on GST, Volume I (2026 edition), Circular No. 172/04/2022-GST and Circular No. 178/10/2022-GST.