The COVID-19 pandemic has changed the very dynamics of the way businesses are run. While on one hand, it is necessary to keep Business running whereas on the other hand, it is equally important to ensure the wellbeing and safety of employees. To tide over the current situation and to ensure the safety of the employees, Businesses are spending a considerable amount of money in procuring goods and services such as health insurance policies, sanitizers, temperature checking equipment, mask, transportation facilities etc.
Certain goods and services such as health insurance for workers etc. are made mandatory in terms of the Notifications issued by the Central & State Governments under the Disaster Management Act, 2005 (‘DM Act’)
An obvious question arises that whether Input Tax credit (‘ITC’) on such goods and services is available under the present situation
In terms of Section 16 of Central Goods and Services Tax Act, 2017 (‘CGST Act’) read with relevant Rules, every registered taxpayer can to avail ITC on inward supply used or intended to be used in the course or furtherance of his business. It cannot be denied that such goods and services are used in the course of furtherance of Business, and as such in terms of provisions of Section 16 ITC is otherwise eligible on them.
However, notwithstanding provisions of Section 16, the lawmakers have insisted upon denying credit on certain goods and services as specified under Section 17(5) of the CGST Act. Accordingly, it is necessary for such goods and services to pass the test of Section 17(5) also, before deciding the eligibility of ITC on the same.
In terms of Clause (b) to Section 17(5) ITC is restricted on the following Goods and services namely food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, life insurance and health insurance, membership of a club, health and fitness centre, travel benefits extended to employees on vacation such as leave or home travel concession.
The proviso to the said clause, however, makes an exception to ITC on such goods and service, where it is obligatory under any law for the employer to provide the same to their employees. Accordingly, in terms of the said proviso, ITC is available on goods and services covered under the said Clause, where it is mandatory under any law that the employer must provide the same to their employees
Presently, under the DM Act, Health insurance for 'workers' is made mandatory by the Government in view of COVID-19 situation, and as such in terms of the above provisions ITC can be availed on the same
Before availing ITC, one must also understand that provisions of the DM Act are enforced in extreme situations and are subject to roll back or changes as and when the situation returns to normal. In such a case availment of ITC will again be questioned. Availment of ITC may also be disputed by the Department on the grounds that all the employees of the Company are not covered under the category of 'Workers' as defined under the Code of Wages Act and the Factories Act.
As far as availment of ITC on goods such as masks, sanitisers, hand wash etc. are concerned, clause (g) of Section 17(5) restricts ITC on Goods and/or Services used for personal consumption.
Presently, there is no clarity on what constitutes items for personal consumption and as such a stand can be taken that such goods in the nature of items that are used for personal consumption. However, such a narrow view will add to increased cost burden of the Businesses which are already facing severe financial constraints
Accordingly, on a practical note, availment of credit on such items can be decided on the quantum involved and depending upon the risk appetite of the Company
Disclaimer: The content of this GST updates is solely for informational purpose. It does not constitute professional advice or recommendation of the firm. Neither the author nor firm and its affiliates accept any liabilities for any loss or damage of any kind arising out of any information in this GST updates nor for any actions taken in reliance thereon