GST on Notice Pay, Canteen and Employee Recoveries: 2026 Rules

Last reviewed: 25 September 2026. Three employer-side GST questions keep resurfacing in audits and departmental notices: whether GST applies when an employer recovers notice pay from an employee who exits early, whether GST applies when part of a canteen or transport cost is recovered from staff, and whether GST applies to smaller exit-time recoveries such as an unreturned laptop or mobile. The first is close to settled in the employer’s favour by CBIC Circular 178/10/2022-GST dated 3 August 2022. The second is not. CBIC Circular 172/04/2022-GST dated 6 July 2022 and a line of advance rulings support the employer, but the advance ruling authorities remain divided, and the Maharashtra AAR in Thyssenkrupp Industries India Pvt Ltd (reported March 2026) has held subsidised canteen and transport recoveries taxable — a ruling from this firm’s own jurisdiction that every Maharashtra employer must now plan around. What follows sets out what is genuinely settled, what is still contested, and the limits on canteen and transport input tax credit that employers most often miss.

Notice pay recovery: why it is not a “supply”

Under most employment contracts, an employee who resigns is required to serve a notice period, and the appointment letter typically allows the employer to recover pay in lieu of the unserved portion if the employee leaves early. For a period after GST’s introduction, some field officers took the position that this recovery was consideration received by the employer for “agreeing to tolerate an act” under paragraph 5(e) of Schedule II to the CGST Act — treating the amount recovered as if the employer were being paid to tolerate the employee’s early exit. That entry has not been deleted. It remains on the statute book and officers still invoke it; what CBIC Circular 178/10/2022-GST dated 3 August 2022 did was read it down. The circular clarifies that a recovery of this kind is compensation for breach of the employment contract — liquidated damages fixed in advance to cover the employer’s loss from a shorter notice period — and not consideration flowing for any independent service of “tolerating” the breach; paragraph 5(e) is engaged only where there is an independent agreement to tolerate for which the payment is the price. The Maharashtra Authority for Advance Ruling applied exactly that reasoning in Ferrero India Pvt Ltd (Order No. GST-ARA-62/21-22/24-25/B-172 dated 27 March 2025), holding that notice pay recoveries are not a supply. Note what carries the weight here: under Section 103 an advance ruling binds only its applicant and that applicant’s concerned or jurisdictional officer, so Ferrero is persuasive support for a reply rather than authority another employer can claim as of right. It is the circular that binds the officer. The distinction that matters legally is between (a) a payment that compensates for a loss flowing from breach of an obligation, which is not a supply, and (b) a payment that is itself consideration for agreeing to refrain from or tolerate something, which can be a supply. Notice pay recovery, properly structured, falls in the first category.

Canteen and transport recoveries: cost-sharing, and where the authorities diverge

Many employers are statutorily required to run a canteen — from 21 November 2025, under Section 24(1)(v) of the Occupational Safety, Health and Working Conditions Code, 2020, in an establishment where one hundred or more workers, including contract labourers, are ordinarily employed (for periods before 21 November 2025, under Section 46 of the Factories Act, 1948, where more than 250 workers were ordinarily employed) — and many also provide bus transport under HR policy or a union settlement. Where the employer recovers only part of the actual cost from employees, rather than running the canteen or transport as a profit-making activity, the mainstream view is that no GST arises on the recovery, and two provisions carry that view. Entry 1 of Schedule III to the CGST Act places services by an employee to the employer in the course of employment outside GST altogether, and paragraph 5 of CBIC Circular 172/04/2022-GST dated 6 July 2022 clarifies that perquisites provided by an employer to an employee in terms of the contractual agreement of employment are not subject to GST. The Gujarat AAR and AAAR in Tata Motors Ltd, and rulings such as Amneal Pharmaceuticals, apply that reasoning to canteen recovery. The drafting point is therefore not cosmetic: the recovery has to be traceable to the employment contract or HR policy as a perquisite arrangement, and the facility has to be traceable to the statutory or settlement obligation behind it.

It is not, however, settled, and a Maharashtra employer should not be told that it is. The Kerala AAAR in Caltech Polymers held canteen recovery from employees to be a taxable supply. More recently — and more importantly for clients in Thane and the rest of Maharashtra — the Maharashtra AAR in Thyssenkrupp Industries India Pvt Ltd (reported March 2026) held subsidised canteen and transport recoveries taxable, on the reasoning that a deduction from salary supplies the element of consideration and that only a facility provided entirely free of charge qualifies as a non-taxable perquisite. In our view that reasoning is difficult to square with Circular 172/04/2022 and with Schedule III, and a circular binds the departmental officer in a way an advance ruling given to another applicant does not. But the honest advice is to plan on the footing that the point is contested at first instance: quantify the exposure, keep the statutory basis, the actual cost of the facility and the quantum recovered documented contemporaneously, and take a considered, recorded view rather than assume the question is closed.

The input side is where employers most often over-claim, and it deserves separate attention. Section 17(5)(b)(i) blocks credit on food and beverages and on outdoor catering, and Section 17(5)(a) read with Section 17(5)(b)(i) blocks credit on motor vehicles for the transportation of persons with an approved seating capacity of not more than thirteen persons (including the driver) and on the leasing, renting or hiring of such vehicles. The proviso to Section 17(5)(b), as substituted with effect from 1 February 2019, restores credit only “where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.” Three consequences follow, and each of them reduces the credit actually available:

• Only where a law compels the facility. A contract, an HR policy or a union settlement is not a law for the time being in force. Where the canteen is compulsory under Section 24(1)(v) of the OSH Code (or, for periods before 21 November 2025, Section 46 of the Factories Act) the proviso applies; where a company runs a canteen or a cab service purely as a benefit, it does not, and the credit stays blocked.
• Only the employer’s share. Even where the proviso applies, credit is restricted to the cost actually borne by the employer, and the portion referable to the amount recovered from employees has to be reversed. That is what the Gujarat AAAR held in Tata Motors Ltd — credit on the canteen service provider’s GST only to the extent of the cost borne by the employer — and it has been followed consistently since.
• Only for direct employees. Credit is not available in respect of contract workers, manpower supplied through a third party, or visitors, even where they eat in the same canteen. The caterer’s invoice has to be apportioned on headcount, not claimed in full.

A lower threshold for mid-size units. The OSH Code threshold is one hundred workers, and it counts contract labourers, against more than 250 under the Factories Act. A unit that was below the old threshold may therefore be obliged to provide a canteen from 21 November 2025, which may bring its canteen credit within the proviso from that date. Check the headcount, the applicable rules under the Code for your State, and the date from which the obligation applied before re-working the credit.

For employee transport there is a better answer than the proviso, and it is the one that fits most factories. The Section 17(5)(a) block applies only to motor vehicles with an approved seating capacity of not more than thirteen persons including the driver. A bus or coach above that capacity is outside the block altogether, so credit on hiring buses to bring workers to a plant is available on its own terms and does not depend on any statutory obligation at all. An employer running cabs or small vans for staff is in the opposite position: those vehicles are inside the block, no law compels the facility, and the credit is simply not available — an HR policy or a settlement clause will not unlock it. Keep three facts on record: the OSH Code headcount that makes the canteen obligatory, the approved seating capacity of the vehicles hired, and the split between employer-borne cost and employee recovery. Those three decide both the output-side question and the quantum of credit.

Other exit-time recoveries: laptop, mobile, uniform deposits

The same underlying test extends to smaller, routine exit-time recoveries — recovering the depreciated value of a laptop or mobile phone not returned on exit, or forfeiting a uniform or asset deposit. Where these are genuine cost-recovery arrangements tied to company property or a deposit scheme, and not structured as a fee for a service the employer is “selling” to the employee, the same “not a supply, no consideration for an independent service” logic applies and no GST is attracted. The dividing line again comes back to substance: a recovery that simply makes the employer whole for a loss or unreturned asset is different, in law, from an arrangement where the employer is charging for something in the nature of a service.

Table: the recovery types at a glance

Worked example: a mid-size company's exposure if it gets the drafting wrong

Consider a company with 400 employees where the HR policy states that employees may be required to pay a “canteen service charge” for meals and a “transport service charge” for pickup and drop, framed in the appointment letter as a fee for a facility the company provides. Employee recoveries for the year total ₹36 lakh (₹3 lakh per month across canteen and transport). If a departmental audit takes the view that, because of this drafting, the company is “supplying” food and transport services for consideration rather than merely sharing a statutory cost — the view the Maharashtra AAR took in Thyssenkrupp — GST at 5% (the rate ordinarily applied to canteen and outdoor catering supplies of this kind, without input tax credit, subject to the specific notification applicable) could be demanded on the ₹36 lakh recovered, which is ₹1.8 lakh of tax, plus interest under Section 50 from each month’s due date.

The larger number is usually on the input side, and it bites independently of how the output-side question is decided. If the company has been claiming full credit on the caterer’s and the bus contractor’s invoices, the credit referable to the ₹36 lakh recovered from employees is liable to be reversed with interest even on the taxpayer-favourable view, because credit is confined to the cost borne by the employer. Any credit taken on cabs of thirteen seats or fewer, or on canteen cost attributable to contract workers, is not available at all. Across a multi-year audit it is this reversal, and not the ₹1.8 lakh of output tax, that turns a drafting problem into a seven-figure demand — and it is almost entirely avoidable through careful drafting and apportionment of the same underlying arrangement.

Common mistakes and red flags

• Calling the recovery a “service charge” or “facility fee” in the appointment letter or HR policy, which invites the argument that the employer is supplying a service for consideration.
• Running the canteen or transport facility at a margin (recovering more than the actual cost, or treating it as a revenue line), which undermines the “not a business” characterisation.
• Treating an HR policy, an appointment-letter clause or a union settlement as the “legal obligation” that unlocks the proviso to Section 17(5)(b) — it requires an obligation under a law for the time being in force, such as Section 24(1)(v) of the OSH Code (Section 46 of the Factories Act for periods before 21 November 2025), and nothing less will do.
• Claiming the full input tax credit on the caterer’s invoice instead of reversing the portion referable to the amount recovered from employees, and instead of apportioning out contract workers and visitors (Gujarat AAAR, Tata Motors Ltd).
• Hiring cabs or small vans of thirteen seats or fewer for staff transport and claiming credit on them, when the answer for a plant is usually to hire buses above that seating capacity, which fall outside the Section 17(5)(a) block altogether.
• Treating the canteen recovery question as closed because a favourable advance ruling exists — under Section 103 a ruling binds only its applicant, and the Maharashtra AAR has gone the other way in Thyssenkrupp (2026).
• Treating notice-pay recovery, canteen recovery and asset recovery as identical for GST purposes without checking that each rests on its own “not a supply” reasoning.
• Charging GST defensively on these recoveries “just in case,” which can itself trigger questions on why GST is being charged on what is, in substance, compensation or cost-sharing, and can create an unnecessary ITC pass-through issue for the employee.

What should you do now

HR and Finance should jointly review appointment letters, HR policy documents and any employee handbook clauses that describe notice-pay, canteen or transport recoveries, and re-draft any language that frames these as a “service” or “charge” the company sells to employees. The safer and legally more accurate framing is liquidated damages for notice pay, and a contractual perquisite or cost-sharing arrangement for canteen and transport, supported on the file by the OSH Code headcount (or, for periods before 21 November 2025, the Factories Act headcount) or the settlement clause that makes the facility obligatory. Run a parallel review on the input side, which is where the money usually is: confirm that credit has been restricted to the employer-borne cost, that contract workers and visitors have been apportioned out, and that no credit has been taken on vehicles of thirteen seats or fewer. Where the company has historically charged GST on these recoveries out of caution, review whether that GST was correctly charged and whether a refund or credit-note correction is appropriate, since incorrectly charged GST creates its own complications for both employer and employee. Finally, any notice alleging that these recoveries are taxable should be answered by placing Circular 178/10/2022-GST (for notice pay) and Circular 172/04/2022-GST paragraph 5 with Entry 1 of Schedule III (for canteen and transport) squarely before the officer, together with the company’s own policy documents and cost records — and by dealing with Thyssenkrupp head-on rather than hoping it is not cited, since a circular binds the officer where an advance ruling given to another applicant does not.

Frequently asked questions

This article is general information for educational purposes, not an opinion on any specific case or a substitute for professional advice; the legal position summarised here can change, so please verify current status and consult a qualified professional before acting on your own facts.