ITC on canteen, transport, insurance and other employee benefits

Two questions in every audit: is the credit blocked, and is the recovery from employees taxable. They must be answered together.

The statutory obligation exception, used properly

The exception applies where the employer is under a legal obligation to provide the facility. The claim requires three things: the provision of law relied on, evidence that its threshold applies to your establishment, and evidence that what was provided is what the law requires.

For a canteen, the obligation arises under the Factories Act and the corresponding state rules where the specified number of workers is employed. The claim should annex the headcount, the state rule and the licence.

For transport, the obligation is narrower and usually arises under specific state rules or conditions of approval, particularly for night shifts for women workers. A general safety policy is not a law in force.

For insurance, the obligation may arise from a statutory scheme or from a condition imposed by an authority. Group insurance provided as a benefit, without an obligation, remains blocked.

The output side

Where the facility is provided free of cost as a perquisite under the contract of employment, Circular 172/04/2022-GST records that it is not liable to tax. The contract or the policy should therefore say so.

Where an amount is recovered from the employee, the analysis depends on whether the employer is supplying the facility or merely collecting on behalf of a third party as a pure agent. Advance rulings have gone both ways, and the arrangement documents decide it.

The safest structure, where commercially acceptable, is that the facility is a contractual benefit, the employer bears the cost, and any employee contribution is a deduction in terms of the employment contract rather than a price for a supply.

The credit position on the common heads

Canteen and catering: blocked, unless the statutory obligation exception applies, in which case credit is available to the extent of the obligation.

Employee transport by contract carriage or blocked vehicles: generally blocked; buses above the seating threshold are outside the block altogether, which is why the vehicle configuration matters.

Group health and life insurance: blocked, unless statutorily obliged. Insurance of blocked motor vehicles is separately dealt with by clause (ab).

Uniforms, safety equipment and tools: not within Section 17(5) at all, and credit is available on the ordinary business use test.

Relocation, hotel stay and travel for business: not blocked as such; travel benefits extended to employees on vacation, including leave or home travel concession, are blocked.

Authorities relied on

What to do on Monday

1. Prepare a benefits matrix — facility, statutory obligation if any, credit position, recovery treatment — and have it approved once rather than argued annually.

2. Annex the state rule and the headcount to the credit working for any canteen claim.

3. Check vehicle seating capacity on the registration certificate before deciding the transport credit position.

4. State in the employment contract or policy that facilities are provided as a perquisite under the contract of employment.

Questions we are asked on this

Is credit available on canteen services if we recover part of the cost?

The credit question turns on the statutory obligation exception. The recovery raises a separate output question, and the two should be documented as one arrangement.

Are buses used for employee transport blocked?

A vehicle with approved seating capacity of more than thirteen persons is outside clause (a) entirely, so the block does not apply. Keep the registration certificate showing capacity.

Is credit available on Covid era or statutory medical facilities?

Where a law or an order in force obliged the employer to provide the facility for the period concerned, the exception applies for that period. Keep the order.

Is notice pay recovery taxable?

The better view, supported by circulars and decisions in the service tax line, is that it is not consideration for a supply. It remains a contested head and should be documented in the employment contract.

Can we take credit on employee insurance if our customer contractually requires it?

A contractual requirement imposed by a customer is not a law in force. The credit remains blocked, though the cost is recoverable commercially.

In this cluster

• Input tax credit under GST: the complete 2026 position
• Section 16(2)(c): can your ITC be denied because the supplier did not pay tax?
• Section 16(4) time limit for claiming ITC: what survives after the amnesty
• GSTR-2A and 2B mismatch notices: how to answer without conceding
• Blocked credits under Section 17(5): the clause by clause map
• Safari Retreats: what the Supreme Court decided on ITC for construction, and what Parliament then undid
• ITC reversal under Rules 42 and 43: working the formula correctly
• Rule 37: ITC reversal when you do not pay your supplier within 180 days
• Rule 37A: reversal where your supplier did not file its GSTR-3B
• Rule 86A blocking of the electronic credit ledger: the remedies that actually work

GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.