ITC on Factory Canteen Services: Eligibility, Restrictions and Impact on Employers

Background: Karnataka AAR ruling in Aditya Auto Products & Engineering India Pvt. Ltd.

The Karnataka Authority for Advance Ruling, in the matter of Aditya Auto Products & Engineering India Pvt. Ltd. [KAR. ADRG 25/2026 dated May 19, 2026], examined whether an assessee can avail input tax credit (ITC) on GST paid to canteen service providers operating a statutory canteen within a factory.

The ruling clarifies that:

  • ITC on canteen services is permissible only to the extent of the expenditure actually borne by the employer in relation to regular employees; and
  • ITC cannot be claimed:
    • for canteen services relatable to contract workers, and
    • on the portion of canteen cost recovered from employees.

This decision is rooted in the interpretation of Section 17(5)(b) of the CGST Act, 2017 read with Section 46 of the Factories Act, 1948 and relevant CBIC clarifications.

Factual Matrix of the Case

Business operations and workforce

Aditya Auto Products & Engineering India Pvt. Ltd. is engaged in manufacturing, selling and trading of automotive components falling under HSN 8708, supplying primarily to OEMs and Tier-I manufacturers.

Key factual aspects:

  • The assessee runs three manufacturing facilities in Karnataka.
  • It employs around 1,288 regular employees (excluding contract workforce).
  • This head count crosses the statutory threshold under Section 46 of the Factories Act, 1948, which requires canteen facilities to be provided where more than 250 workers are ordinarily employed.

Canteen arrangement with service providers

To comply with the mandate under Section 46 of the Factories Act, 1948, the assessee:

  • Appointed Canteen Service Providers (CSPs) to operate canteens within the factory premises.
  • The canteen is used by:
    • regular employees; and
    • workers engaged through contractors.

The cost-sharing mechanism was as follows:

  1. Regular employees

    • A subsidised contribution in the range of ₹250/- to ₹300/- per month is recovered via salary deduction.
    • The remaining cost of food and allied services is borne directly by the assessee.

  2. Contract workers

    • A concessional amount towards canteen usage is recovered from the contractors/suppliers.
    • The assessee raises monthly tax invoices on such contractors, charging GST @ 5% on the recovery.

The central question raised before the AAR was whether ITC of GST charged by the CSPs on such canteen services is admissible in full, partially, or not at all.

Core Issue Before the AAR

Question for ruling

The assessee sought an advance ruling on the following key issue:

Whether ITC is available on GST paid on canteen services supplied by the Canteen Service Provider, where the assessee is obliged to provide such canteen facility under Section 46 of the Factories Act, 1948?

The answer depended on:

  • the interplay between the blocking provision under Section 17(5)(b) of the CGST Act, 2017;
  • the statutory obligation under Section 46 of the Factories Act, 1948; and
  • the pattern of cost recovery from employees and contractors.

Statutory Framework: ITC on Food and Canteen Services

Blocking provision under Section 17(5)(b)

Section 17(5)(b)(i) of the CGST Act, 2017 generally disallows ITC on the following supplies, among others:

  • food and beverages;
  • outdoor catering;
  • health services;
  • life insurance and health insurance, etc.

This implies that, as a rule, ITC on canteen services would ordinarily be blocked.

However, the first proviso to Section 17(5)(b) – inserted by the CGST (Amendment) Act, 2018 with effect from February 01, 2019 – creates an exception, stating that ITC 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.”

Accordingly, for canteen services:

  • If an assessee is mandatorily required by law to provide such facility to employees, ITC is not barred by Section 17(5)(b) for that portion.
  • If the provision of canteen facility is purely voluntary or only contractual, ITC remains blocked.

Statutory obligation under Section 46 of the Factories Act, 1948

Section 46 of the Factories Act, 1948 provides that:

“The State Government may make 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.”

Read with relevant State Factories Rules, this creates a legal obligation on the occupier of qualifying factories to:

  • set up; and
  • maintain

a canteen for the workers.