Outdoor catering as input service

Possibly taking a cue from the adage “There ain't no such thing as a free lunch”, service tax laws have been hazy about allowing input tax credit on outdoor catering services. The erstwhile Rule 2(1) of the Cenvat Credit Rules, 2004 was liberal enough to permit any goods/services directly or indirectly involved in the manufacture of goods or provision of services as inputs for the purposes of claiming Cenvat Credit. Differing decisions of the Central Excise and Service Tax Appellate Tribunal (CESTAT) on the allowability of outdoor catering as an input service only resulted in confusing the claimants.

Negative list

Using the Budget as a weapon, the Government decided to nip the issue in the bud by enacting all-new Cenvat Credit Rules. Rule 2(l)(c) of these Rules introduced a sort of a negative list for claiming input credit. The negative list included services such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as leave or home travel concession when such services are used primarily for the personal use or consumption of any employee. The intention appears to be to negate claims for expenses that are passed off as business expenses, but are in effect personal in nature.

International VAT

Internationally too, food and tax laws have been uneasy bedfellows. A large pharmaceutical company had an arrangement called “Advantage Fund” one of the components of which was provision of retail meal vouchers in lieu of salary. The company completed its VAT returns on the basis that it was not required to charge output VAT on the provision of the vouchers and that it was not entitled to deduct as input VAT the VAT which it had paid in purchasing the vouchers. However, the company subsequently claimed that as the cost of acquiring the vouchers was a business overhead, it ought to be entitled to deduct the VAT resulting from that acquisition, and not to charge output VAT on the provision of the vouchers at issue to its employees, on the grounds that they were not provided for consideration.

Her Majesty's Revenue and Customs refused the claim and ruled that that if the company were to be able to recover input VAT, it would have to account for output VAT on the supplies of the vouchers to its employees on the grounds that either the vouchers were provided for consideration (since a deduction was made from the employee's Fund) or the vouchers were made available to the employees for the purposes other than business purposes.

Benefits vs salary sacrifice

The matter travelled to the European Court of Justice (ECJ) which ruled that Article 2(1) of the Sixth Directive must be interpreted as meaning that the provision of a retail voucher by a company, which acquired that voucher at a price including VAT, to its employees in exchange for their giving up part of their cash remuneration constitutes a supply of services effected for consideration within the meaning of that provision. The HMRC has quickly amended VAT rules by stating that From January 1, 2012, value-added tax (VAT) will be imposed on the provision of several benefits offered via salary sacrifice, including bikes-for-work, computers, gym membership, and food and catering. As a clarification, it states that where bikes-for-work schemes have been offered through a salary sacrifice arrangement, employers must account for output tax based on the value of the salary foregone by the employee in exchange for the hire or loan of a bicycle. However, this is not the case where an employer provides, for example, a workplace gym, which all employees may use without deduction or reduction in their salary.

Let taxpayer benefit

The above decision and earlier ones in India confirm catering as a genuine business expense. The negative list contemplated by Rule 2(l) would need to be pruned to remove outdoor catering and take a relook at life and health insurance and travel benefits. The benefit of doubt in such quasi-business expenses should be given to the taxpayer.

(The author is a Bangalore-based chartered accountant.)