Eligibility of ITC on COVID 19 related Expenses – Potential Bone of Contention between Assessee & Department

COVID 19 has taken the entire world at storm. Declaration of COVID as pandemic by WHO has heightened the attention of the world on the serious implication ofthe disease. As we write this article, COVID 19 has impacted 216 countries with over 6.1 million confirmed cases as per the status update from WHO.

The pandemic has given rise to various new regulations/ advisories issued by various governments as the use of masks, sanitizers etc. and practicing of social distancing has become the new ‘normal’.

Regulations post COVID-19

In India also, both Central and State Governments along with various agencies has brought about various regulations with respect to functioning of the businesses. Some of the major regulations are discussed below;

  • Union Government has invoked its powers under Epidemic Diseases Act, 1897 (hereinafter referred to as ―EDA) and Disaster Management Act 2005 (hereinafter referred to as ―DMA) and have been taking various measures timely and proactively to contain the spread of virus.
  • Ministry of Home Affairs (MHA) have been issuing various orders with respect to activities permitted. The orders have specific mention that States/ UT Governments cannot dilute these guidelines, though may impose more stringent conditions. The most recent order as on the date of publication of the article was dated 30th May, 2020.

Some of the major requirements are;

a) Use of Face Masks by all employees

b) Installation of Thermal Scanners at the entry of office

c) Frequent sanitization of the workplace, particularly of the frequently touched surfaces.

d) Ensure regular supply of hand sanitisers, soap and running water in the washrooms.

e) Ensuring social distancing at workplaces

f) Special Transportation facilities for workers coming from outside to reduce dependency on public transport [Present in earlier guidelines dated 15th April 2020, not mentioned in revised guidelines dated 30th May 2020]

g) Medical Insurance of workers [Present in earlier guidelines dated 15th April 2020, not mentioned in revised guidelines dated 30th May 2020]

  • Ministry of Health Affairs has issued guidelines on preventive measures to contain spread of COVID-19 in workplace settings on 18.05.2020. The guidelines are recommendatory in nature.

[https://www.mohfw.gov.in/pdf/GuidelinesonpreventivemeasurestocontainspreadofCOVID19inworkplacesettings.pdf].

  • Ministry of Corporate affairs has also issued a notification dated 26th May, 2020 whereby donations made to Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM-CARES Fund) form part of CSR activities.
  • In addition, different States may have also issued various guidelines with respect to functioning of workplaces post opening after Lockdown due to Covid-19.

Whether the expenses related to the preventive measures eligible for ITC?

The above regulations require business to shell out money on various items like Sanitizers, Masks, Social distancing apps, Medical insurance of workers, Buses for transportation, disinfection of office spaces etc.

It is thus imperative to understand whether the registered person under GST can claim ITC on above expenses.

Sec 16(1) of CGST Act states that “every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person”

The Hon’ble SC in case of Commissioner of Income-Tax, Kerala v. Malayalam Plantations Limited [1964 (4) TMI 9 – Supreme Court] has held that the expression ‘for the purpose of the business’ may include not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery. It may include measure for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile titles. It may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business. It may also bring in many other acts incidental to the carrying on of a business.

From the above Judgment, it can be inferred that expenses incurred by a taxable person to run the business should be termed as expenditure incurred in the course of business. To protect employees from the spread of COVID 19, employer incurs the subject expense so that business can run smoothly. Since all the above expenses are used in the course or furtherance of business, the above expenses are eligible as per section 16(1) subject to section 17(5).

As per Sec 17(5)(b), ITC is not available on supply of following goods or services viz;

  • 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

However, input tax credit 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.

Further, as per proviso, 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.

Thus, the ITC can be claimed on the supply of goods or services specified in section 17(5)(b) if these specified expenses are mandated as per any law for the time being in force.

The above table illustrates such cases;

S.No. Nature of Expenses Whether Ineligible as per Sec 17(5) Eligibility if mandated by law Whether mandated by Ministry of Home Affairs guidelines
1 Masks, PPE Kits for Employees Eligible Yes Yes
2 Sanitizers Eligible Yes Yes
3 Sanitization services for Office/ Factory Premises Eligible Yes Yes
3 Medical Insurance of Employees Ineligible Yes/ No Mentioned in SOP of social distancing in MHA Order dated 15.04.2020.Not mentioned in revised guidelines issued as on 30.05.2020
4 Social distancing apps Eligible Yes Yes
5 Renting of Motor Vehicles more than 13 passengers including driver for transportation of employees Eligible Yes/ No Mentioned in SOP of social distancing in MHA Order dated 15.04.2020. Not mentioned in revised guidelines issued as on 30.05.2020
6 Renting of Motor Vehicles upto 13 passengers including driver for transportation of employees Ineligible Yes/ No Mentioned in SOP of social distancing in MHA Order dated 15.04.2020. Not clearly mentioned in revised guidelines issued as on 30.05.2020. However, the guidelines require staggered working hours to maintain social distancing
6 Purchase of ceiling fans / renovation of central Air conditioning unit to make it Covid compliant Eligible No No
7 Life Insurance of employees Ineligible No No mention

It is further recommended that the invoices of all the above expendituresshall be in the name of the registered entity with proper mention of its GSTIN so that there is no cause of any potential dispute. Further it is also recommended that a separate ledger may be opened in books of accounts to book such expenses.

Furthermore, these expenses should not be considered for personal consumption as per section 17(5)(g) as these expenses are incurred due to obligation casted under law for the time being in force.

Donations / Supply of free goods due to COVID-19

In this era of pandemic various organizations are coming forward to help the society and undertake various welfare measures. The question which arises whether such expenditure may be eligible for ITC.

In this regard, it is important to note section 17(5)(h) states that ITC cannot be availed on goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

We give below the following scenarios for donations made by corporates and their treatment under GST

S.No. Description of Donation Eligibility Test as per Sec 16(1) of CGST Eligibility Test as per Sec 17(5) (h) of CGST ITC may be Claimed or Not?
1. Provision of Food to poor / Buses for Migrant labourers/ Shelters for Underprivileged etc It may be treated for the purpose of business if it is part of CSR as per Schedule VII to Companies Act, 2013 If it is a part of CSR than, it may not be deemed as free goods ITC may be claimed
2 Donation to PM CARES Fund It may be treated for the purpose of business if it is part of CSR as per Schedule VII to Companies Act, 2013 It is a money transaction so not applicable Not within Purview of GST
3 Sanitization of Colonies of Employees Business Expenditure as undertaken for Employees Sec 17(5)(h) refers to goods and this being services thus not applicable ITC may be claimed
4 Donation to any NGO  etc. It may be treated for the purpose of business if it is part of CSR as per Schedule VII to Companies Act, 2013 It is a money transaction so not applicable Not within Purview of GST

Schedule I to Section 7 to CGST Act, 2017

The implication of Clause 1 of Schedule I to section 7 to CGST Act, 2017 which states that permanent transfer or disposal of business assets where input tax credit has been availed shall be treated as supply even if without consideration may also be analysed while supplying free goods (business assets) for COVID relief measures specifically in cases which are not covered under mandatory CSR activities.

Way Forward

In light of the above discussion, it becomes even more important for the Government to come forward with a positive clarification for eligibility of ITC with respect to various expenditures by corporates on account of COVID-19. In fact, the government may bring various incentives so that large corporates may synergize their large presence to undertake various social welfare acts which will benefit society as a whole.

In case of any further discussion, do contact the undersigned.

Jointly By:

CA. Chitresh Gupta
FCA, LL.B , B. Com(H)
Co-Author of book “GST –Law, Analysis & Procedures”
Faculty on Goods & Services Tax by ICAI
Email : Chitresh.gupta@gstexperts.net
CA. Shilpi Gupta
FCA, M.Com, B.Com(H) -SRCC
Co-Author of book “GST –Law, Analysis & Procedures”
Faculty on Goods & Services Tax by ICAI
Email : shilpi.gupta@gstexperts.net

DISCLAIMER: The views expressed in this article are personal views of the Authors. This article includes general information about legal issues and developments in the law of GST in India. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. We disclaim all liability in respect to actions taken or not taken based on any or all the contents of this article to the fullest extent permitted by law.

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