The GST law sets out that every registered taxable person who carries on any business at any place in India/State, shall be entitled to take credit of input tax admissible to him which shall be credited to the electronic credit ledger of such person. The credit is available to extent used in course of business to make taxable supply of goods/services/exports. The credit is available subject to specific restrictions set out in section 17(5) of GST law.
In course of the day to day activities done by any entity, various expenses are being incurred. Some of the expenses are towards telephone, mobile/internet charges, accommodation in hotel, business travel by air/motor vehicles, cab service for pick and drop of employees to and from office, uniforms and protective helmets for employees, food/drink, canteen facility, membership of clubs/trade or industrial associations, accident insurance, group insurance, keyman insurance, life/health insurance.
Several of these expenses are incurred for employees in course of discharging their official functions. The question which arises is whether all such expenses which are incurred for employee, could be said to be eligible as being used for the benefit of the business. We examine this and other aspects on availment of ITC on employee related expenses in this article.
In this backdrop, the paper writer has examined the eligibility to credit on the employee costs. The eligibility is examined in light of the amendments made in provisions related to blocked credit, which was inserted by GST Amendment Act 2018 dated 30.8.2018 and wef 1.2.2019
List of relevant blocked credit in context of employee costs wef 1.2.2019
1. For motor vehicle having approved seating capacity of not more than 13[including driver]: ITC on motor vehicle would be admissible in following cases:
• When used for the purpose specified- onward supply of vehicle/supply of transport of passengers/ training services on motor vehicle driving
ITC on leasing, renting or hiring of such motor vehicles for transport of persons is available as follows:
• When used for the purpose specified- onward supply of vehicle/supply of transport of passengers/ training services of motor vehicle driving
• Where inward supply of such service is used by the registered person for making an outward taxable supply of same category of goods or services/ or as an element of a taxable composite or mixed supply
• Where it is obligatory for an employer to provide such services to its employees under any law for time being in force
Credit on general insurance/repairs/maintenance in respect of such motor vehicles as follows:
• When used for specified purposes given above-onward supply of vehicle/supply of transport of passengers/ training services on motor vehicle driving
For motor vehicle with approved seating capacity of more than 13 persons, no restrictions on availing vehicle related credit.
2. The credit is restricted on food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, life insurance and health insurance: Input tax credit in respect of such goods or services or both shall be available where
- An inward supply is used for making an outward taxable supply of the same category or as an element of a taxable composite or mixed supply.
- When obligatory for an employer to provide such services to its employees under any law time being in force
3. Membership of a club, health and fitness centre, travel benefits extended to employees on vacation such as leave or home travel concession. Input tax credit shall be available where It is obligatory for an employer to provide to its employees under any law for time being in force
Comments: The restriction on credit of membership of the club is oppressive as networking which is essential for business growth happens in clubs.
4. Goods disposed off as gifts.
Comments: Recent circular has also clarified credit cannot be availed on gifts Ref: Circular No. 92/11/2019-GST.
5. The credit on goods/ services, when used for personal consumption, is restricted.
Comments: Such credit could be denied when used for personal use and not for goods/services used by employees/others in course of discharge of business functions.
Eligibility to credit on specific commonly incurred expenses:
1. Credit of tax paid on uniforms/safety shoes/protective head gear/helmets: These are used by the employees of company, in course of business. These could be worn on shop floor as protection for employees when engaged in different manufacturing activities or processes/ against heat/cold/dust particles etc. Eligible to such credit.
2. Telephone/mobile expense: The credit is eligible when used in course of business. However, dept may deny whole/part alleging personal use by employee. A reasonable portion may be reversed for personal use[based on past experience] to ensure such objections to credit availed are not raised at time of audit.
3. Air travel by company directors/employees: Expenditure incurred on air travel by employees/directors of the company for official purpose is eligible for credit subject to proper documentary evidence. Similarly held in CCE vs Fine Care Biosystems (2009 (244) ELT 372 (CESTAT) and Goodluck Steel Tubes Ltd. Vs C. C. Ex., Noida 2013 (32) S.T.R. 123 (Tri. - Del.).
4. Lodging/Boarding: The input tax credit on hotel rent for employees/executives for business and client meetings is directly relatable to assessee’s business. Therefore, credit could be admissible. Similarly held in One Advertising & Communication Services Ltd. vs C.S.T., Ahmedabad (2012 (27) S.T.R. 344 (Tri. - Ahmd.).
5. Outdoor catering: When outdoor catering services are given for providing food to staff. Facility provided because of statutory obligation imposed under Section 46 of Factories Act, 1948 and it becoming condition of service as far as employees concerned. Expenses incurred considered in fixing price. Activity may be welfare measure but not charity provided by the employer to employees. Test whether service utilized for manufacture directly or indirectly or used in relation to activities relating to business. Accordingly held in Stanzen Toyotetsu India Pvt. Ltd. vs. C. C. Ex., Bangalore-III 2009 (14) S.T.R. 316 (Tri. - Bang.)Affirmed in 2011 (23) STR 444 (Karnataka High Court). Credit available.
Credit could be available when food/drink facility is given in discharge of obligation under law, but maybe disputed by dept alleging it is for personal use of employees, if ITC was being availed of 5%/18% as charged by contractor. Further details on eligibility to such credit given below.
6. Employee accident insurance: As it is not health/life insurance the credit could be eligible. There is no policy for health and accident together. Accident insurance is necessary for the Company to provide to employees. It is in furtherance of business
In Milipore India Ltd Vs CCE Bangalore –II (2009 (236) ELT 145 (Tri-Bang). Affirmed in 2012 (26) STR 514 (Karnataka High Court) held there was no restriction on availment of such insurance credit.
Dept may dispute accident insurance may be covered as per the Insurance Act within health. Risk is if denied then credit reversal could be subjected to 24% interest as well
When co takes call to avail such credit intimate dept by RPAD letter plan to avail and seek confirmation on eligibility to such credit. If objected, reverse under protest with a letter setting out why it is available.
The decisions referred above under erstwhile laws have persuasive value under GST as well.
Eligibility to credit when recoveries made from employees towards canteen/cab/insurance
When recovery done towards canteen facility:
The recovery towards canteen is taxable at 18%/12% from 1.7.2017 to 14.11.2017[with input tax credit] and at 5%[without input tax credit post that date]. Tax to be paid on valuation as under Rule 28 of GST rules, ie on open market value of same or similar services or cost plus 10%. Tax can be paid on value determined based on contractor invoice.
It is significant that when such food/drink credit is specifically enabled when tax is paid on outward supply of same category of services, whether such credit should be restricted via notification no.11/2017-CT(rate) when output GST is paid at 5%. Such condition restricting the credit may not be correct as a notification cannot be permitted to over-ride the enabling provisions in the law.
Recovery done for employee transport facility:
The recovery towards transportation services is taxable at 5% from 1.7.2017 to 13.10.2017[without input tax credit] and at 5%[with input tax credit post 13.10.2017]. Tax to be paid on valuation as under Rule 28 of GST rules, ie on open market value of same or similar services or cost plus 10%. Tax may be paid on value determined based on contractor invoice.
Recovery towards insurance:
It may do well to recall that in Posco India Pune Processing Center Pvt Ltd (2019-TIOL-25-AAR-GST) where there was recovery of Parents Health Insurance expenses from the employee in respect of the insurance provided by the applicant. Since the applicant is not rendering any service of health insurance to their employees, there is no supply of service u/s 7 of the CGST Act, 2017.
Comments: This view has not considered the Schedule I-entry 2 of GST Law, which deems supply of service between related persons[employer to employee] as supply even without consideration and informed to that extent and not in line with GST law.
Taking a conservative view, tax could be paid on recovery done under GST regime. However, dept may dispute the credit alleging that since the employer is not insurance co, the input service of insurance is not used to make taxable service of same or similar category and consequently may demand back such credit with interest. This view may not be correct, as in view of paper writer when the output suffers tax, the corresponding credit should be permissible.
Relevant advance rulings
In National Aluminium Company Ltd Advance Ruling Order No.02/ODISHA-AAR/18-19 Dated 28th September, 2018 issue was whether the applicant is entitled to take input credit of tax paid on various goods and services used for maintenance of applicant's townships, guest houses, hospitals and horticulture for paying output tax.
Held that service by way of residential accommodation in the colonies or otherwise is a perquisite which has been clarified as not chargeable to GST implying thereby any perquisite including residential accommodation is an exempt supply. In the result, the inward supplies received by way of management, repair, renovation, alteration or maintenance service or goods received for furnishing the residential colony shall not qualify for input tax credit in terms of Section 17 (2) of the OGST/CGST Act. The services which are being availed clearly in relation to the residential colony shall not qualify for input tax credit. AAAR_Odisha upheld the decision of AAR_Odisha.
In Posco India Pune Processing Center Pvt Ltd (2019-TIOL-25-AAR-GST) where issue was credit eligibility for hotel which is used as a residential accommodation by the MD/GM.
Held it implies that the same is used for their personal consumption. Providing residential accommodation in a hotel is not in furtherance of the applicant's business. Since the accommodation is being used for their personal comfort, in view of the provisions of s.17(5)(g) of the CGST Act, applicant is not eligible to claim the ITC for the same: AAR.
Note: Advance rulings are applicable to the assessee who applies for it and to their set of facts. It is having merely persuasive value for others.
In this article, the paper writer have examined the provisions of credit on employee-related expenses under the GST regime briefly.
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