Eligibility of input tax credit | section 17(5) | CGST Act, 2017

1) Executive Summary:

As per section 17(5) of CGST Act, 2017, there are certain input services such as health services, life insurance and health insurance, renting or hiring of motor vehicles which are under the blocked category and the service recipient of these services cannot availed and utilised against set-off Output liability. Considering the current situation of Covid-19 Pandemic, the Companies has to incur such type of expenses for the safeguard of their employees/workers under the instruction of the guideline’s issued by Ministry of Home Affairs (hereinafter referred to as ‘MHA’) for the same.

Herein, i will highlight the important aspects of the sections and eligibility of the Input Tax credit which enforced to incur under guidelines of MHA.

2) Analysis of Section 17(5) and its impact:

The section 17(5) of CGST Act, 2017, has prescribed the nature of input services which are restricted to avail unless it is used for same nature of services or in the nature of composite supply or mixed supply.

Relevant extract of the section is as under:

(b) the following supply of goods or services or both—

i. food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

ii. membership of a club, health and fitness centre; and

iii. travel benefits extended to employees on vacation such as leave or home travel concession:

Based on the reading of the extract of section 17(5) of CGST Act, 2017, the Input services pertaining to health services, renting or hiring of motor vehicles and life insurance and health insurance are restricted/blocked from availment of Input Tax credit against set-off output liability for the month. This Covid-19 Pandemic and guidelines issued by MHA in this regard put the burden of additional expenses on the shoulders of employers to comply the compliances of guidelines as specified in the issued Standard Operating procedure and in case of non-compliance of the same will invite prosecution and penalties under Indian Penal Code, 1860 and Disaster Management Act, 2005.

3) Relaxation in the section 17(5) towards availment of blocked Input Tax Credit:

As per proviso of clause (b) of section 17(5) of CGST Act, 2017, the Input Tax credit on above referred barred categories of services can be eligible to Company wherein it is under obligation of any law which is time being in force.

Relevant extract of the law states is as under:

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force. ]

Herein, it is pertinent to mention that the Input Tax credit on the above referred services can be availed wherein the any other law for the time being in force obligates to employer to provide these facilities to their employees. In this time of Covid-19 Pandemic, the Ministry of Home Affairs (‘MHA’) has issued the Order No. Order No. 40-3/2020-DM-I (A) dated 15^th April, 2020 by exercising of power conferred under section 10(2) (i) of Disaster Management Act, 2005

As per the Order issued by MHA, the offices, workplaces, factories and establishments have to implement the Standard Operating Procedure (‘SOP’) prescribed in the Annexure-I and II wherein serval measures to be taken and adopted for their employees. As per Annexure-II of the Order, the employers have to facilitate following major aspects for their employees:

• Disinfected all the areas of workplaces/offices/factories/establishments wherein the employees probably visit such as cafeteria, entrance gate, meeting room, conference room, washrooms, equipment etc.,
• Transportation facility for employees coming from outside,
• Medical Insurance,
• Thermal scanning and Cameras,
• Provision for hand wash and Sanitizer, and,
• Others

Please refer the Order Issued by MHA for the detailed guidelines.

Further, it is pertinent to mention that as per Annexure-III of above referred Order issued of MHA, the absences of non-compliances of the above facilities, there are serious penalties and prosecution under the Indian Penal Code, 1860 and Disaster Management Act, 2005.

Currently, the Disaster Management Act, 2005, is in force due to Covid-19 Pandemic, accordingly, employers have to implement the facilities or processes prescribed in the Guidelines issued by the MHA by above referred Order.

By referring this Order issued under Disaster Management Act, 2005, which enforced the employers has to avail services of health Insurance, Rent-a-cab and purchase products for better sanitization at office premise and thermal scanning. Since, the above services are covered under blocked category of Input Services u/s 17(5) of CGST Act, 2017, towards availment against set-off Output liability, however, the applicability of Disaster Management Act, 2005, enables to avail the Input Tax Credit by virtue of proviso of clause (b) of the section 17(5) which provide the relaxation wherein other law being in force obligates to employer to avail such service.

4) Authors View:

Accordingly, as per my understanding, the Input Tax Credit on the following categories of services can be availed even though it is under barred category under section of 17(5) of CGST Act, 2005, till the date of enforcement of law of Disaster Management Act, 2005. Since, it is not specifically clarified by Ministry of Finance, the department or revenue authorities can take different view on the same.

Hence, the Ministry of Finance has to come with specific circular/notification to provide clarification on the same.

Hope the above article on Input Tax Credit is useful.

References:

• Section 17(5) of CGST Act, 2017,
• Order Issued by Ministry of Home Affairs