In a month ago, Country was in requirement for a lot of medicine, equipment supplies and now the vaccinations. There are no. of employers who had come forward to either help their employees or the society by providing such materials at free of cost.
In this pandemic time, supplies like masks, sanitizers, thermal scanners, vaccines are going to be a regular procurement which shall be provided for employees as the pandemic will last few more months or years.
Procurement of these supplies are done by paying GST and the question here is whether the ITC on such supplies which are provided for the welfare of employees/ provided as a part of Corporate Social Responsibility (CSR) to the society shall be allowed as eligible ITC.
Why is the question on its eligibility?
- Section 16 allows only ITC on goods or services used for the furtherance of business
- Section 17(5)(b) allows only ITC on goods or services provided to employee if it is obligatory under any law to provide the same
- Section 17(5)(h) restricts ITC on goods distributed by means of gift
Considering the above points, it is essential to validate whether the covid-19 supplies would fall under the above points to understand their eligibility.
COVID supplies provided to Employees:
The Ministry of Home Affairs (‘MHA’) has issued many orders with respect to the guidelines to be followed in the office premises. Few of the guidelines are usage of face masks by all employees, installation of thermal scanners at the entry of office, regular sanitization of workspace, ensuring regular supply of soaps or hand sanitizers and many more.
To ensure adherence with the guidelines mentioned by The Ministry of Home Affairs every corporate may need to shell out money for purchasing the same, which would also include the GST component.
In order to get ITC of the above supplies, the supplies need to undergo the following two tests:
- Test 1: Eligible under Section 16 – Satisfy that it was rendered for the furtherance of business
And
- Test 2: Not ineligible as blocked credit under Section 17(5) – Specific supplies provided to employees
Test 1:
There are no case laws under GST, but we can draw reference on the same note from the Income Tax Laws. In the case of Commissioner of Income Tax Kerala, V/S Malayalam Plantations Limited [1964 (4) TMI 9-SC] it was held that the term ’purpose of business ‘may include the day to day running and also include measure for the preservation of the business.
Though there is no outright mention about Input Tax Credit eligibility on preventive measures in the GST Act, from the intention of the law, it can be derived that these expenses will be treated as rendered for the furtherance of business.
Test 2:
According to the section 17(5) ITC is not available on food and beverages, outdoor catering, life insurance, health insurance etc. if provided to employees will not be eligible as eligible Input Tax Credit. However, there is a provision under the said section that the same shall be allowed if it is mandated under any law for the time being in force.
No specific law has made it essential for providing such supplies to the employees except for health ministry issuing guidelines and on a plain reading of the provisions, it may be ineligible under the GST Laws.
However, consider the recommendary nature of guidelines, the revenue may consider the same eligible as well.
COVID 19 supplies provided as CSR:
In terms of section 17(5) (h) of the CGST Act, CSR activities like donating COVID-19 related medical equipments or any other supply on which tax was paid and distributed by means of gift will be ineligible to claim as Input Tax Credit under the GST Laws.
Again, the government needs to bring in some clarity whether such donations/ Corporate Social Responsibility activities shall form part of the business and ITC of the same shall be availed.
As of now, the law does not permit to claim the general relief material provided. However it has to be analyzed on a case to case basis as sometimes it is provided for a concessional rate and if ITC is availed it may also be a deemed supply under Schedule I, for which value shall be defined under the rules of GST.
Final Words:
As per the above discussion, much expectation is on the govt. to come out with some clarification on the eligibility of ITC with respect to the expenditures incurred by Corporates towards employees or to the society at large.