1. Background:

The entire world has been engulfed in tackling COVID-19 and so India. Declaration of COVID as pandemic by WHO has heightened the attention of the world on the serious ramification of the disease. This has also created obligations on the States to undertake necessary preventive and relief measures.

Indian has been proactively tackling this pandemic at the Centre and State level jointly. 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.

2. DMA, EDA and guidelines issued by State Government

Epidemic Disease Act (EDA) is pre independence legislation of 1897 enacted to bestow powers to the Central Government and State Government to prescribe regulations for prevention of speared of dangerous epidemic diseases.

Disaster Management Act (DMA) was enacted to tackle disasters at both Central and State Government levels. The Central Government has notified COVID as notified disaster under this Act.

Many of the States Governments have also notified the regulations under EDA. Many States including Karnataka, Maharashtra, Delhi and Kerala have issued advisories on management and brought into place ‘Covid-19 Regulations, 2020’ (“Regulations”).

3. Order issues by MHA for COVID

Various Guidelines and orders have been issued periodically by the Ministry of Home Affairs under provisions of DMA. The orders have specific mention that States have to compulsorily follow these guidelines and they cannot give any relaxation, though may impose more stringent conditions.

One of the important order[1] issued by MHA under DMA provides for guidelines and relaxation for reopening of commercial and industrial activities w.e.f. 20.4.2020. Para 21 (ii) of Guidelines provides that all industrial and commercial establishments, work places office etc. shall put in place arrangements (SOP) for implementing SOP in Annexure II before Starting their functioning. Some of the important measures in the SOP relevant for present discussion are as below:

a. For workers coming from outside, special transportation facility shall be arranged without any dependency on the public transportation system

b. Mediclaim insurance for the workers to be made mandatory.

In addition to the above, there are additional guidelines for the manufacturing and industrial establishments with access control in SEZ, EOU, Industrial Estate and industrial township. These establishments shall make necessary arrangements for stay of workers within their premises as far as possible and/or adjacent building. The transportation of workers to work place shall be arranged by the employers in the dedicated transport by ensuring social distancing.

Above guidelines require business to make necessary arrangements for restart of their business operations. The businesses may require incurring various nature of expenses which could be primarily below:

  • Mediclaim insurance
  • Transportation facility from home to work place and vice vesa
  • Expenditure incurred for sanitation facility i.e. sanitizer, PPE kits, medical facility, spraying disinfects
  • Stay arrangement
  • Food and so on

We examine ITC eligibility on such expenses in the ensuing paragraph.

4. Input Tax Credits under GST

Section 17 (5) of the CGST Act puts restrictions on availment of ITC on many expenses especially where such expenses are incurred for the employees. However, in many of such instances, ITC is permissible where the expenses are incurred as per statutory requirement under the law. The relevant extract is reproduced below:

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.

Essential conditions to avail the ITC in such cases could be discussed as below:

  • Obligatory for the employer: There should be obligation on the employer to provide such goods or services or both to the employees. The SOP issued by MHA provides that “following measures shall be implemented by all offices, factories and other establishments”. This indicates that is obligatory for the employer to ensure that mediclaim insurance is taken for the employees.
  • Obligation is towards the employees: ITC may be availed where such obligations are towards employees. MHA guidelines require that the mediclaim is mandatory for all the workers. The word ‘worker’, in the given circumstances, could be interpreted to include all employees of the establishment. Further, it could also include the casual workers or contractual works employed through any other contractor.
  • Obligatory under any law for the time being in force: MHA guidelines have been issued under DMA Act and is mandatory to be followed by all the States. Section 72 of the Act provides that the provision of DMA shall have overriding effect over any other law for the time being in force. Hence, it could be said to be mandatory under any law for the time being in force.

Thus, apparently all above conditions get fulfilled and hence the ITC on the same should be admissible.

However, there are some grey areas to be considered before taking a final view.

  • Binding nature of guidelines issued: We recollect that MHA had issued order dated 30.3.2020 wherein all employers have been asked to make full payment of wages to their workers ant their work place on the due date without any deduction for the period of lock down. The order has been challenged before Supreme Court on the ground that there is no jurisdiction with the authority to issue such orders to private establishments.
  • Guidelines dated 1.5.2020 fails to save the earlier order dated 15.4.2020: Government has announced revised guidelines on 1st May for 3rd lockdown wherein some of the earlier guidelines have been saved. However, there is no specific reference of the guidelines based on order dated 15.4.2020 wherein insurance etc. were made mandatory.

These could be grey areas to be resolved but in view of the paper writers, once the order has been issued by the Ministry of Home Affairs and it is mandatory for anyone to continue business activities to abide by such order failure of which could invite penal action, it could very well be said that the such services are covered in the clause “mandatory for employer under the law”. ITC therefore should be eligible. Various nature of expenses and applicability of these provisions could be tabulated as below:

Nature of expenses ITC eligible Eligible if mandatory under law Whether covered in MHA guidelines
Food and beverages No Yes No
Hiring of motor vehicles (more than 13 vehicles capacity vehicles) Yes NA (ITC is eligible in all cases) Yes
Leasing, renting or hiring of motor vehicles No Yes Yes, for transportation of workers
Life insurance No Yes No
Health Insurance No Yes Yes
Guest houses etc. No/Yes* NA Yes (for specified industries)
Sanitizer, PPE Kits and other medical facilities No/Yes* NA Yes

* ITC is eligible if incurred in the course or furtherance of business. However, ITC not admissible if used for personal consumption.

5. FAQs on various employee related expenses

Based on above background, we discuss ITC eligibility on above expenses in the question and answer format.

Q 1. We are having manufacturing facilities. Can we take input tax credit of GST paid on employee Mediclaim insurance?

Ans: Health insurance is covered under the blocked credit unless such insurance is obligatory for an employer to provide the same to its employee under any law for the time being in force. Guidelines issued by MHA under DMA requiring mandatory Mediclaim insurance for the workers could be said to be mandatory requirement under the law and hence the ITC of the same should be eligible.

Q 2. The guidelines provide for Mediclaim insurance for the “worker”. Whether employees could be said to be covered within the definition of workers?

Ans: The guideline as well as the Act does not provide the definition of workers. However, considering the context of guidelines, it would not be appropriate to confine the meaning of workers only to the employees working in factory etc. Further, the approval required to be obtained for the reopening of businesses require Mediclaim insurance for all the employees. Hence, the benefits of ITC should be admissible in respect of all the employees including for contractual workers if the cost is borne by the Company.

Q 3. Whether any differences based on nature establishments i.e. offices, factories or any other establishment for the purpose of availing the input tax credits?

Ans: The preamble to standard operating procedure issued by MHA guidelines covers all offices, factories and other establishment. Hence, in view of the compulsory requirement to obtain the insurance for all such establishment, ITC of the same should be eligible to all such establishments.

Q 4. Mediclaim insurance policy was obtained prior to issuance of guidelines. Whether ITC would be available on such insurance policies also? (i.e. policy taken on 1.1.2020 for 12 months expiring on 31.12.2020)

Ans: Conditions of availment of ITC have to be satisfied on the date of receipt of services. Where the insurance ITC was not admissible on the date of receipt of insurance policy, ITC of the same may not be claimed now (fully or proportionately).

There is another view also that the eligibility or otherwise of ITC u/s 17 (5) need not be seen only on the date of receipt of supply of goods or services. This is also supported from the clarification issued by Government w.r.t. section 17 (5) (h) where it has been held that ITC is not available in respect of the goods lost, stolen, destroyed, written off etc. even in case of manufacturer also (where it may not be known as to occurrence of such event at the time of procurement). Hence, any post facto change in the treatment of goods or services could make the ITC eligible or ineligible.

In present case, the employer having Mediclaim facilities in force before order of MHA need not take new policy. This could lead to a possible view that the order of MHA is complied with in such cases also and the ITC of the same should be eligible. However, this has to be judicially tested.

Q 5. Existing policy did not cover COVID. Additional policy has been taken or additional premium has been paid for coverage of COVID in existing policy. Whether ITC would be admissible on such top up/additional policy?

Ans: Considering that the additional policy or top up has been taken in order to fulfil the requirements of the MHA guidelines, it could be said to be obligatory for the employer and hence the ITC of the same should be eligible.

Q 6. Policy has been taken by the company but in the individual name of the employees. Whether ITC would be admissible?

Ans: Where the policy has been taken in the name of individual employee, not in the name of entity, ITC may not be admissible to the entity.

Q 7. Part of premium has been recovered from the employees? Whether ITC of the same would be admissible?

Ans: It has been held by AAR in case of Posco that the recovery of insurance premium from employee does not become a supply as the company is not permitted to provide the insurance services. It could be said that to the extent of recovery of premium from the employees, the services are not availed by the company and hence ITC of the same may be questioned.Similar view has been held under Cenvat Credit[2] regime also.

Q 8. Insurance policy also covers the dependent of the employees. Whether ITC of the GST paid on entire premium could be claimed?

Ans: There is no requirement under the guidelines to extend the insurance coverage to the family members of the employees. In the absence of the same, ITC may not be admissible to the extent of premium pertaining to the family members. In order to avoid the dispute, it is suggested to indicate the premium pertaining to the family members separately in the insurance policy, claim document, invoice etc.

Q 9. The insurance policy normally covers the entire period of one year. Whether ITC may be claimed for the premium paid for full year or it would be eligible only to the extent of period of lockdown?

Ans: Obtaining Mediclaim insurance is mandatory for the employer irrespective of the time limit. Hence, ITC should be admissible for the full premium paid. There is no reason to restrict it to the period of lock down.

Q 10. Whether all future Mediclaim insurance would be eligible for ITC?

Ans: It depends upon the period of operation of MHA guidelines. These guidelines have been issued under power vested in Union Government under DMA Act which is invoked in exceptional situations. If the guidelines are withdrawn in future, ITC may not be admissible for the policies taken after withdrawal of such guidelines unless taking insurance is made mandatory under any other law or regulations for the time being in force at that point of time.

Q 11. Many employees have been working from home. Whether ITC may be claimed in respect of such employees also?

Ans: Attending offices upto certain limit is only permissible under the guidelines. All other employees have to work from home. Further, the policy has to be taken for all the employees. Hence, there is no restriction in claiming ITC in respect of the workers working from home.

Q 12. Life insurance policy has been taken for the employee. Whether ITC on the same would be admissible?

Ans: No conditions have been imposed in the MHA guidelines for life insurance. Hence, the ITC of the same may not be admissible.

Q 13. Whether ITC may be claimed on the vehicles deployed for transportation of employees?

Ans: Hiring, leasing or renting of motor vehicle is not eligible ITC unless mandated under any law for the time being in force. MHA guidelines require that special transportation facility shall be arranged without any dependency on the public transportation system for workers coming from outside. There is no defined meaning of ‘outside’. It could be construed as provision of transportation facility for workers not staying in the factory or place of business. Hence, in our view, all employees would get covered where transportation facility is provided for their commutation. ITC in such cases may be summairsed as below:

Transportation through MV having more that 13 seating capacity Eligible irrespective of MHA guidelines
Transportation through other motor vehicles (renting, hiring or leasing of MV) – payable under RCM or FCM Eligible under MHA guidelines

Note: many of the State Government requires taking e-pass for reopening of the business wherein the details of vehicles are required to be given. It is suggested to provide details of such vehicles in application for reopening of office to establish that such transportation in in conformity of MHA guidelines.

Q 14. Employee transportation is done through Ola/Uber etc. Whether ITC of the same would be eligible?

Ans: These mediums could get covered within the meaning of public transportation facilities and hence may not be admissible for ITC.

Q 15. It has been normal business practice of the company to provide for the transportation facility to the employees where ITC has not been taken in the past. Whether there would be change in the answer in case of such companies?

Ans: Transportation facility provided by the company in past could be said to be as per needs or policy of the business and was not in accordance with any statutory requirement for the time being in force. Hence, ITC on the same was not admissible. However, once it has become statutory requirement for the business to provide such facilities, ITC on the same could be claimed even if the same facilities were provided in the past without ITC.

Q 16. Whether ITC may be claimed for the expenses incurred on PPE kits, sanitizer etc which are made available for use of the employees?

Ans: ITC on such items is eligible as these expenses are incurred in the course or furtherance of business and may not be said to be for personal consumption of the employees. Further, some of such expenses are considered eligible expenses for CSR purpose. Considering that CSR is one of the legal requirement of the business, ITC of the same should be admissible. However, sometimes, businesses take a call not to take ITC on CSR attributable expenses as they have to incur contribute certain percentage towards CSR. To the extent of ITC availed, the companies may require to make additional contribution in order to fulfil CSR limit.

Q 17. Guest house or hotel facilities have been arranged for the employees near the factory. Whether ITC may be claimed on such expenses?

Ans: Hotels or guest house facility, in the normal course, may be construed as expenditure incurred in the course or furtherance of business. There have been judgments under service Tax law[3] holding that guest house facility is in the nature of personal nature of expenses and not eligible for cenvat credit. There is condition u/s 17 (5) where ITC may not be claimed for the expenses incurred for personal consumption.

MHA guidelines require maintenance of accommodation facility in case of SEZ, EOU, Industrial Estate and industrial township. Such expenses may not be said to be in the nature of personal expenses and hence ITC on the same should be eligible for such establishment.

Even for other establishments, ITC on such expenses should be admissible as provision of such facility under present circumstances may not be said to be in for personal consumption or personal purpose.

Q 18. Food or canteen facilities provided to the employees. Whether ITC on the same may be claimed?

Ans: Food and beverages are covered within blocked credit unless it is provided in accordance with any law for the time being in force. Canteen run in accordance with the Factories Act could be said to be covered within the statutory requirement and ITC of the same was admissible even in the earlier period. Such entities would continue to be eligible for ITC in the COVID period also.

With respect to other entities not covered within the definition of factory or not required to have such facilities for the employees, we have not come across any guidelines under MHA order to compulsorily provide such facilities. In the absence of the same, ITC on the still continues to be covered under blocked credit.

Q 19. Many facilities in the nature of laptop, computer, furniture, internet etc. are required to be provided to the employees for effective WFH. Whether ITC on inward supply of such goods and services may be availed?

Ans: Section 16 (1) of Act provides for eligibility of input tax credit in respect of supply of goods or services in the course or furtherance of business. Employees working from home during COVID is in the course of business and hence the test of section 16 (1) stands satisfied.

Further, section 16 (2) provides that the goods or services must be received for availing ITC. There is no requirement that the such procurement should be at the place of business only unlike cenvat credit rules where inputs and capital goods were required to be received in the factory of manufacturer. Hence, receipt of goods or services of these by the employee could be said to be receipt by the Company and ITC on the same should be eligible.

Q 20. What precautions should be taken for availment of above ITC?

Ans: Many of the ITC discussed above may be of available only for the temporary period. In order to establish the eligibility of the same, following are suggested course of actions:

  • Establish the requirement to comply with the regulations issued by MHA read with the regulations issued by the concerned State Government or District Magistrate. Preserve relevant documents.
  • File letter with jurisdictional office setting out grounds justifying eligibility of ITC.
  • Wherever in doubt, avail the ITC and do not utilize it till clarity emerges.
  • Evaluate the facts of the business before taking any final decision .

Conclusion:

In this period of economic difficulties, it is imperative for each business to evaluate possible measures to reduce the cost. One should closely look at all expenditure where input tax credit has not been taken in the past to evaluate if there exist possibilities of availing due to change in the law or judicial developments.

There could be possibility of revenue taking negative view on some of such credits. It is suggested to thoroughly examine the facts before taking conclusive decision.

You may reach to authors at ashish@hiregange.com or nayansharma@hiregange.com

(Note: FAQs in this paper are not designed or released by Board. These have been framed by authors considering various practical scenarios arising in the business. The compilation is merely for knowledge dissemination and must be independently examined before taking any final view. Authors shall not be responsible for any decision taken based on this paper.)

[1] No. 40-3/2020-DM-I (A) dated 15th April 2020

[2] 2016 (41) S.T.R. 1002 (Tri. – Del.). 2016 (43) S.T.R. 362

[3] 2019 (27) G.S.T.L. 539

Author Bio

Qualification: CA in Practice
Company: Hiregange & Associates
Location: Gurugram, Haryana, IN
Member Since: 01 May 2019 | Total Posts: 5

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4 Comments

  1. Akhil says:

    Hi Ashish Ji,
    I have a doubt. The question is
    Mr. A purchased furniture for office use to be placed at his home since he is working from home and got reimbursed from his employer. Can ITC on gst paid on such furniture can be claimed by the employer?
    Thanking you in advance !!
    Regards,
    Akhil

  2. Chaithanya Kumar says:

    Hi Ashish Ji,

    Thanks for an elaborate explanation on ITC credit availment on Various expenses based on MoHF orders dated 20th April, 2020.

    I have a doubt that whether this ITC availments continues post MoHF order dated 17th May, 2020 as the order override all the guidelines given in earlier orders.

    Request you to clarify.

    Regards,

    Chaithanya Kumar

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