GST & Indirect Tax

GST on Employee Recoveries: Canteen, Transport and Notice Pay: Rules, Limits and Worked Examples

📅 June 2026·Reviewed 19 June 2026GST✔ cbic-gst.gov.in

Employer recoveries from employees — for subsidised canteen meals, bus passes, notice pay, uniform charges and accommodation — have uncertain GST treatment. CBIC circulars, advance rulings and court decisions have gradually clarified the position, but significant grey areas remain. This guide maps the current consensus position for each category.

For the connected rule, example or next step, see GST on Employee Recoveries and Notice Pay: Return, ITC and Notice Checklist.

Finin2min answer: There is no blanket rule that canteen is always exempt or transport is always taxable — each employee recovery must be tested against Circular 172/04/2022-GST: it is outside GST only if the facility is a genuine contractual or statutory perquisite restricted to employees. On that test, canteen, transport, accommodation and uniform recoveries are generally not a separate taxable supply, while notice pay and training-bond recoveries are compensation for breach of contract (Circular 178/10/2022-GST), not a supply at all. These circulars remain the current operative CBIC guidance as of FY 2025-26.

The Decision Framework: Test Each Recovery, Don't Assume a Category Rule

There is no single blanket rule that "canteen is never taxable" or "transport is always exempt." Per Schedule III (services by an employee to employer in the course of employment are outside GST) read with Circular 172/04/2022-GST, a recovery is generally outside GST only when the underlying facility is a genuine perquisite rooted in the employment contract — i.e., the company is contractually or statutorily obligated to provide it, it is restricted to employees, and it ceases on termination of employment. The same facility provided outside the employment contract, or to non-employees (e.g., trainees), or as a discretionary/optional extra, can be a taxable supply. Each recovery type below needs to be tested against this framework on its specific facts, not assumed from the category alone.

For the connected rule, example or next step, see GST on Freight, GTA and Transport Charges: Return, ITC and Notice Checklist.

Recovery Type	GST on Recovery?	Basis
Subsidised canteen meals (deducted from salary), where canteen is provided as a contractual/statutory perquisite restricted to employees	Generally not a separate taxable supply to the employee — the recovery is treated as netting against the perquisite's value, not a standalone supply under Section 7	Circular 172/04/2022-GST; Schedule III
Bus/transport pass deducted from salary, where transport is a contractual employment perquisite restricted to employees	Generally not a taxable supply, on the same perquisite logic as canteen — not because of a generic "employee transport is exempt" notification entry	Circular 172/04/2022-GST; Schedule III (Notification 12/2017-CT(R) separately exempts certain third-party-operated public transport services, which is a different basis)
Notice pay recovery (employee pays for early exit)	No GST — not a supply; compensation/tolerance for breach of the employment contract, not consideration for any service rendered by the employer	Circular 178/10/2022-GST; consistent AAR rulings
Accommodation recovery (company guesthouse), where accommodation is a genuine contractual perquisite for employees	Generally not a taxable supply if rooted in the employment contract and restricted to employees; if provided to non-employees (e.g., trainees not on payroll) or outside the contract, it is a taxable supply	Circular 172/04/2022-GST; Schedule III — there is no general ₹1,000-per-day threshold rule for this purpose
Uniform cost recovery (mandatory uniform, recovered at cost as part of employment terms)	Generally not a taxable supply if mandated by the employment contract and recovered at or below cost	Circular 172/04/2022-GST
Training cost recovery (employee leaves early, bond/training-cost clawback)	Treated similarly to notice pay in most consensus analysis — a clawback of training cost on early exit is generally compensation for breach rather than a supply of training service to the employee, but this is a less settled area than notice pay; case-specific review is recommended	Analogous reasoning to Circular 178/10/2022-GST; AAR rulings vary, so confirm on the specific facts

Canteen Recovery: The Circular 172 Position

CBIC Circular 172/04/2022 clarified that when an employer provides subsidised canteen services through a third-party caterer, and recovers a portion of the cost from employees as a contractual perquisite:

For the connected rule, example or next step, see Blocked Credit: Employee Benefits, Cars, CSR and Personal-Use Traps.

The employer is not making a separate supply to the employee of food, provided the canteen is a genuine contractual/statutory perquisite restricted to employees
ITC on canteen services provided by the caterer may be blocked under Section 17(5)(b)(i) — food and beverages restriction — unless the employer is obligated to provide the canteen under the Factories Act or another law
If obligatory (e.g., factory with 250+ workers), ITC on canteen is available, generally apportioned to the extent recovered from employees in line with CBIC's guidance
The recovery from employee, where the perquisite test is met, is not treated as a standalone taxable supply

Notice Pay Recovery: No GST

✅

Notice Pay Is Not a Supply: When an employee pays notice pay to the employer for exiting without serving the full notice period, it is treated as compensation for breach/tolerance of the act, not consideration for a supply of service — GST is not applicable. This position is specifically confirmed by Circular 178/10/2022-GST, which clarifies that liquidated damages, compensation and penalties arising from breach of contract terms (including notice pay recovery) are not consideration for a separate "agreeing to tolerate an act" supply, and is consistent with subsequent AAR rulings.

Worked Example: Manufacturing Company Payroll Deductions

Case Study: Amar Industries — 500-Employee Factory, Pune

Monthly payroll GST impact; factory covered under Factories Act, canteen and transport are contractual perquisites restricted to employees

Canteen recovery (₹30/meal × 500 × 22 days)

₹3.3L/month — not a standalone taxable supply (contractual/statutory perquisite test met); caterer ITC available since canteen is obligatory under Factories Act

Transport recovery (₹800/employee/month)

₹4L/month — not a standalone taxable supply, since transport is a contractual perquisite restricted to employees (not because employee transport is exempt as a category)

Notice pay received from 2 employees

₹1.2L — no GST (Circular 178/10/2022-GST; compensation for breach, not a supply)

Training recovery (1 employee left in 6 months)

₹50,000 — generally treated like notice pay as compensation, but less settled; legal opinion recommended given the contract's specific wording

Amar Industries' HR team has confirmed canteen and transport are documented contractual perquisites available only to employees (and cease on exit), which is what supports treating the recoveries as outside GST — this isn't automatic just because the category is "canteen" or "transport." The training recovery remains the item needing case-specific confirmation.

Employee recoveries — 2026 classification guardrails

Start with the employment contract, not the payroll deduction label. Schedule III keeps employee-to-employer services in the course of employment outside supply. CBIC Circular 172/04/2022 further clarifies that contractual perquisites provided by an employer to employees in terms of the employment agreement are not subject to GST merely because they are perquisites.

Item	Control question
Contractual perquisite	Is it genuinely part of the employment contract / CTC framework? If yes, apply Circular 172 before treating it as a taxable outward supply.
Notice-pay recovery	Do not treat a breach/exit recovery as consideration merely because money is recovered. Circular 178 requires a real agreement to tolerate/refrain/do an act; compensation for breach is not automatically consideration for supply.
Canteen / transport / insurance recovery	Identify who contracts with the third-party supplier, whether the employer is providing an independent supply, and whether any specific exemption/valuation/ITC restriction applies.
Gift	Do not confuse a contractual benefit with a gift; Schedule I has a specific employee-gift threshold concept.

Evidence file: appointment letter/HR policy, vendor contract, employee consent/recovery clause, payroll ledger, tax invoice, ITC working and accounting treatment.

Primary checks: CBIC Circular 172/04/2022-GST; CBIC Circular 178/10/2022-GST; CGST Act / Schedules.

FAQ

Is TDS deducted on canteen recovery from employees? +

No. Canteen recoveries are salary deductions, not payments to employees. No TDS implications on recoveries. However, the employer's payment to the canteen contractor is subject to TDS under Section 194C of the Income-tax Act (or new Section 393 from Tax Year 2026-27).

Does the company need to issue a GST invoice for notice pay received? +

No. Notice pay received from an employee is a penalty/compensation for breach of contract — not consideration for a supply. No GST invoice should be issued. The amount is income to the employer (business income) but is outside the scope of GST.

Can a company claim ITC on canteen expenses? +

Only if providing canteen services is obligatory under law (e.g., Factories Act mandates canteen for factories with 250+ workers). If obligatory, ITC is available, generally apportioned to the extent of the cost actually borne by the employer (i.e., net of employee recovery), per CBIC's Circular 172/04/2022-GST guidance and Section 17(5)(b)(i). If voluntary/welfare-driven (not legally mandated), ITC on food and beverage-related canteen services is blocked under Section 17(5)(b)(i) of the CGST Act, regardless of whether or not an employee recovery is made.

Source and review trail

Use the current official instrument, portal or regulator publication before acting. This panel separates the category authority from page-specific references.

Primary category: GST & Indirect Tax
Official starting point: www.gstcouncil.gov.in

Page source links

Primary sources & related provisions

Statutory provisions referenced in this guide: