In manufacturing plants across India, factory management routinely contracts external caterers to operate staff canteens and serve daily meals to shift workers. At the close of each billing cycle, the outdoor catering agency raises an invoice charging 5 percent GST. For plant financial controllers and plant accountants, the recurring dilemma is whether this GST represents valid input tax credit or blocked expenditure. While many tax officers dispute food credits during departmental audits, the statutory framework clearly allows credit where an enactment mandates the canteen facility.
The statutory bar under Section 17(5)(b)(i) and the statutory proviso
Under Section 16(1) of the CGST Act, a registered person is entitled to claim input tax credit on goods and services used or intended to be used in the course or furtherance of business. However, Section 17(5) overrides this general rule through an opening non-obstante clause:
“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, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery...” Section 17(5)(b)(i), CGST Act
Ordinarily, food and beverages and outdoor catering services are blocked categories. For a full breakdown of restricted expenditures, refer to our detailed statutory analysis on blocked credit under GST Section 17(5). However, the legislature placed a specific statutory carve-out at the conclusion of clause (b):
“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.” Proviso to Section 17(5)(b), CGST Act
This proviso creates a direct statutory exception. When any law for the time being in force obliges an employer to provide food, catering, or health facilities to its employees, the statutory bar is lifted and input tax credit becomes fully admissible.
Common mistake: Assuming that corporate HR policies or trade union agreements create statutory obligations. An obligation must stem from an enacted statute or legislative rule. Voluntary welfare schemes or contractual appointment letters do not satisfy the proviso.
Section 46 of the Factories Act 1948: the mandatory threshold
The primary legislative foundation creating a mandatory obligation for factory canteens is Section 46 of the Factories Act 1948. This statutory provision establishes clear occupational standards for industrial units:
- Headcount threshold: Under Section 46(1), state governments frame rules requiring that in any specified factory wherein more than two hundred and fifty workers are ordinarily employed, a canteen or canteens shall be provided and maintained by the occupier for the use of the workers.
- Occupier duty: The statutory obligation rests upon the factory occupier. Providing food in an industrial setup with over 250 workers is not a voluntary employee perk, but an enforceable safety and welfare compliance obligation.
- State factory rules: State governments formulate detailed factory rules specifying construction norms, dining area dimensions, hygiene standards, and subsidized meal requirements for such canteens.
Consequently, when a manufacturing facility employs more than 250 regular workers, contracting a catering service provider is an act of statutory compliance under an enacted labour law. This dynamic is directly comparable to statutory employee safety requirements, such as our analysis of ITC eligibility on corporate health insurance.
Clarification by CBIC Circular No. 172/04/2022-GST
Prior to 2022, several field formations argued that the statutory obligation proviso placed after sub-clause (iii) applied exclusively to travel benefits like leave travel concession, rather than catering services under sub-clause (i). The Central Board of Indirect Taxes and Customs resolved this controversy through CBIC Circular No. 172/04/2022-GST dated 6 July 2022.
In Issue 3 of the Circular, the Board examined whether the proviso at the end of clause (b) of Section 17(5) applies to the entire clause (b) or solely to sub-clause (iii). The Board clarified:
“Accordingly, it is clarified 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) of sub-section (5) of section 17 of the CGST Act.” CBIC Circular No. 172/04/2022-GST, Issue 3
This circular confirmed that the statutory exception covers food, beverages, and outdoor catering under sub-clause (i). In addition, the GST Council reiterated during its 28th meeting that the legislative intent was to widen the scope of input tax credit for all obligatory employee welfare services mandated by law. The policy position was formally approved and published on the GST Council portal.
Impact of employee salary recoveries under Schedule III
Most industrial employers do not provide meals entirely free of charge. Instead, factories implement a subsidized model: the employer absorbs 70 to 80 percent of the catering cost, while deducting a nominal amount (such as ₹20 or ₹30 per meal) directly from worker salaries. This operational practice introduces two tax questions:
- Is nominal recovery from workers taxable as an outward supply? In Issue 5 of Circular No. 172/04/2022-GST, the CBIC clarified that perquisites provided by an employer to employees in terms of contractual employment agreements are not subject to GST. Under Schedule III of the CGST Act, services by an employee to the employer in the course of employment are treated as non-supplies. Therefore, deducting a nominal canteen charge from worker wages is not an outward taxable supply.
- Does nominal recovery reduce allowable input tax credit? Yes. Multiple Advance Ruling authorities and appellate benches have consistently held that input tax credit is admissible only to the extent of the net cost borne by the employer. The proportion of GST embedded in the meal recovery deducted from workers represents personal consumption or employee-funded expenditure, which remains blocked under Section 17(5)(g) and Section 17(5)(b).
Apportionment principle: When an employer recovers 30 percent of the food cost from employees, 30 percent of the inward catering GST must be reversed in Form GSTR-3B. Only the remaining 70 percent borne directly as company factory cost qualifies as net eligible ITC.
Contract workers versus permanent factory workers
A critical compliance trap in factory audits involves canteen facilities shared with contract labourers deployed by third-party staffing agencies. The table below outlines how input credit rules apply across different factory workforce categories:
| Workforce Segment | Governing Statute | Statutory Obligation on Plant Occupier | ITC Eligibility |
|---|---|---|---|
| Direct permanent factory workers | Factories Act 1948 Section 46 | Mandatory when plant exceeds 250 workers | Eligible on cost borne |
| Contract labourers (agency payroll) | Contract Labour (R&A) Act 1970 | Obligation rests primarily on contractor | Blocked in audit rulings |
| Administrative office staff on plant | Factories Act definition of worker | Eligible if included in factory register | Requires register audit |
| Corporate head office visitors | Voluntary hospitality | No statutory obligation | Blocked under s.17(5)(b)(i) |
Under Section 16 of the Contract Labour (Regulation and Abolition) Act 1970, the obligation to provide a canteen for contract labour rests primarily on the staffing contractor. Consequently, tax authorities and advance ruling benches (including Gujarat AAAR in Tata Motors) hold that the factory occupier cannot claim input tax credit on the catering proportion consumed by contract labour unless the company proves an explicit statutory mandate obliging the principal employer.
Worked practical rupee example: monthly catering invoice reconciliation
Consider Apex Forgings Private Limited, a precision manufacturing company operating an industrial plant in Pune, Maharashtra. The factory operates with 400 permanent shop-floor workers, well above the 250-worker statutory threshold under Section 46 of the Factories Act 1948.
In September 2026, the company engages Sahyadri Industrial Caterers to prepare and serve daily lunch and tea. At month end, the caterer issues an invoice showing a taxable value of ₹3,00,000 plus 5 percent GST (CGST ₹7,500 and SGST ₹7,500), totaling ₹3,15,000. Under the company canteen policy, the total meal cost is ₹75 per plate. Apex Forgings subsidizes ₹55 per plate (73.33 percent of the cost) and recovers ₹20 per plate (26.67 percent) via payroll salary deduction.
| Cost Component | Share Percentage | Taxable Value | CGST (2.5%) | SGST (2.5%) | Total GST | Credit Treatment |
|---|---|---|---|---|---|---|
| Employer subsidized cost | 73.33% | ₹2,20,000 | ₹5,500 | ₹5,500 | ₹11,000 | Eligible ITC (Table 4(A)(5)) |
| Employee payroll recovery | 26.67% | ₹80,000 | ₹2,000 | ₹2,000 | ₹4,000 | Ineligible Reversal (Table 4(B)(1)) |
| Total Inward Invoice | 100.00% | ₹3,00,000 | ₹7,500 | ₹7,500 | ₹15,000 | Net ITC: ₹11,000 |
In this worked case:
- Gross invoice tax: ₹15,000 (CGST ₹7,500 + SGST ₹7,500).
- Net eligible credit: ₹11,000 (CGST ₹5,500 + SGST ₹5,500), representing the cost absorbed by Apex Forgings.
- Ineligible reversed credit: ₹4,000 (CGST ₹2,000 + SGST ₹2,000), representing the portion recovered from workers.
Filing workflow in Form GSTR-3B and matching with GSTR-2B
To record this inward catering supply accurately in your monthly GST returns without triggering automated system flags, the accounts department follows a structured compliance sequence:
- Verify GSTR-2B reflection on the 14th of the month: The catering contractor must file Form GSTR-1 by the 11th. On the 14th of the month, verify that the catering invoice appears in your Form GSTR-2B under B2B invoices. Ensure the caterer reported the correct GSTIN, invoice number, taxable value of ₹3,00,000, and tax of ₹15,000.
- Auto-population in Table 4(A)(5): On the GST portal, the gross tax amount of ₹15,000 auto-populates into Table 4(A)(5) (“All other ITC”) of Form GSTR-3B. For official return navigation, consult the GSTN GSTR-3B user manual.
- Report permanent reversal in Table 4(B)(1): Do not edit Table 4(A)(5) downward on the portal screen. Instead, report the ineligible recovery portion of ₹4,000 in Table 4(B)(1) (“As per rules 38, 42 and 43 of CGST Rules and section 17(5)”). Because Section 17(5) disallowance is permanent, it must be declared in Table 4(B)(1) rather than Table 4(B)(2).
- Final net credit in Table 4(C): The portal computes Net ITC in Table 4(C) as Table 4(A) minus Table 4(B), crediting exactly ₹11,000 (CGST ₹5,500 + SGST ₹5,500) into your electronic credit ledger.
Documentation required to withstand GST scrutiny audits
Departmental auditors routinely challenge canteen catering credits during annual return scrutiny or departmental audits under Section 65. To defend your claim against Section 73 notices, preserve an audit-ready dossier containing the following verified records:
- Factory license showing headcount: Keep a certified copy of your factory license issued by the Chief Inspector of Factories confirming an approved workforce capacity exceeding 250 workers.
- Daily muster roll and attendance register: Maintain monthly employee attendance summaries demonstrating that average daily worker attendance exceeded 250 persons during the relevant tax periods.
- Catering contract copy: Retain the catering service agreement specifying that the contractor prepares and serves meals within the factory premises exclusively for plant personnel.
- Payroll recovery ledger: Provide payroll registers showing the exact subsidized deduction from worker salaries, matching the proportionate credit reversal recorded in Table 4(B)(1) of Form GSTR-3B.
- GSTR-2B matching audit trail: Maintain an export of your monthly reconciliation showing that the caterer filed GSTR-1 and the tax was fully remitted to the government.
Related guides
- ITC eligibility on employee term insurance and mandatory gratuity
- Restaurant ITC blocked under GST 5 percent
- Construction works contract itc eligibility under GST
- ITC on solar power plant installation on factory roof
- ITC on club, health and fitness centre corporate memberships
Frequently asked questions
Is ITC on canteen catering services available to all manufacturing units?
No. Under Section 17(5)(b)(i) of the CGST Act, food and catering are blocked credits. Input tax credit is available only when an employer is statutorily obligated to provide a canteen, such as factories employing more than 250 workers under Section 46 of the Factories Act 1948.
Can a factory claim ITC on meals provided to third-party contract labourers?
Generally no. Under Section 46 of the Factories Act 1948, the occupier obligation runs toward factory workers, but advance rulings hold that the principal employer lacks an employer-employee relationship with contract staff. Canteen credit for contract labour is routinely blocked unless mandated under separate contract labour statutory orders.
Does nominal salary deduction for meals create an outward GST liability?
No. CBIC Circular No. 172/04/2022-GST clarifies that perquisites provided under employment agreements and employee salary recoveries for canteen services do not constitute a taxable outward supply under Schedule III. However, input tax credit is restricted strictly to the net cost borne by the employer.
Where should factory canteen ITC be disclosed in Form GSTR-3B?
The contractor invoice auto-populates from GSTR-2B into Table 4(A)(5). The eligible portion borne by the company remains in Table 4(A)(5), whereas any blocked credit relating to employee recovery or non-obligatory staff must be reversed in Table 4(B)(1) as ineligible credit under Section 17(5).
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Last checked: 19 October 2026. Sources: CBIC Tax Information Portal (CGST Act Section 17), CGST Act Section 16, CBIC Circular No. 172/04/2022-GST, GSTN GSTR-3B User Manual, GST Council Recommendations.