Impact of COVID 19 on GST
Indian government chose complete lockdown as an important measure to protect human life’s from the rapid spread of COVID 19 outbreak.
Besides human life which is the most important, nationwide complete lockdown has had a worst impact on the economic activities resulted into huge revenue loss to the Government To combat the situation, Hon’ble FM announced a slew of tax measures listed below:
– Extension in timelines for various compliances under GST
– Expeditious clearance of Refund
– Waiver of late fees leviable on delay in filing of returns
– Reduction/waiver of interest on delay in payment of taxes
– Simplification in manner of filing returns
– Deferment of ITC matching required under Rule 36(4)
– Extension in validity of e-way Bill
Despite of above, the taxpayer need to circumspect about tax consequences in possible scenario emerging due to coronavirus pandemic so that informed decision can be made.
> Dispute and Damages
The disrupted business operations may result into defaults in business commitments in the form of delay in performance or cancellation of contract for the supply of goods or services and consequent claim of damages. This would majorly happen in the business that involves continuous commitments such as lease or rental, construction etc.
In the event of a breach of contract or delay in performance of a contract, Party to the contract may attract claim of damages in the form of fine, interest or penalty, if the agreement so warrant. GST shall apply on such damages at the time of receipt as per section 15 of CGST Act, 2017
To analyze the GST implication on cancellation of the contract, it is vital to determine the time when contract has been canceled
Before – services are rendered
√ Supplier is required to issue a credit Note in terms of section 34 of CGST Act, 2017 and tax liability shall be adjusted in return. No refund of tax paid would be allowed to the supplier except where there is no output liability for adjustment.
√ Supplier is required to issue a refund voucher in terms of section 31(3)(e) of CGST Act, 2017 and Supplier can apply for a refund of GST paid on such advance under the category “Refund of excess payment of tax”
> Forego/waiver of consideration to the supply
Despite of disruption on all counts, on should not disregard that humanity stands all above. It has witnessed a complete forego/waiver of consideration by some of the supplier of goods or service such as rent etc.
GST is not applicable to supply made without consideration. However, where such waiver is between the related parties, the entire consideration shall be chargeable to tax in terms of schedule I of CGST Act, 2017. Further, it is important to document such a waiver by each party involved.
> Sale Discounts
To revive from non-stop lockdown for more than 50 days, a business may provide a huge discount to the customers for various reasons such as a decrease in the market value of goods, non-availability of funds, etc.
The discount shall be allowed as a deduction under GST Law, if
1) Discount is given before or at the time of sale and mentioned in the Invoice
2) Post sale discount is established in terms of an agreement entered before the time of such supply and specifically linked to relevant Invoices; and
3) Input tax credit attributable to the post-sales discount based on a document issued by the supplier has been reversed by the recipient of the supply
> Payment of tax dues without receipt from the customer
The continued lockdown seems to throw everyday new commercial challenges qua operations. These are leading to an increase in procurement costs coupled with unavoidable tax cost on the sale of such procurement thereon.
Meaning thereby, GST has to be paid even if the amount is not realized from the customer in terms of section 12 & 31 of CGST Act, 2017. This has happened since the Notification 35/2020- Central Tax dated 3rd April, 2020 issued for extending the time limit of compliance of any action falling between 20th March, 2020 to 29th March, 2020 to 30th June, 2020, specifically exclude the time of supply & issuance of tax Invoice provision from such relaxation being extended.
> ITC on supply of goods provided as a relief measure during COVID – 19 (CSR Activity)
Get the better of COVID 19 pandemic requires individual own personal safety and safety of others as well via various means including use of Mask, Sanitizer, Gloves etc. Due to non-availability of such items with the public at large, some of corporate are distributing them free of cost in order to fulfill its corporate social responsibility.
Under Income Tax, the expense incurred for CSR is considered as eligible expenses for the deduction. However, as per Clause (h) of section 17(5) of CGST Act, 2017, disposed of or written off of goods by way of gift or free samples, is not eligible for ITC.
It is worthwhile to note that this clause is under litigation. Accordingly, the eligibility of ITC of GST paid on the purchase of such goods shall be analyzed in detail.
> Input Tax Credit on destroying/loss of goods during Lockdown
Hon’ble Prime Minister announced the lockdown, very sudden, with virtually no time to anyone including business for recalibration and redesigning. This has lead companies to suffer damage of perishable raw materials and finished products.
Under GST, ITC of taxes paid on procurement of raw material or finished goods have been allowed to set off against the future liabilities. However, section 17(5) of CGST Act, 2017 restricts the ITC of taxes paid on procurement of goods that are stolen, lost or destroyed.
Some of the expert holds the view that ITC of GST paid on goods lost or stolen should be allowed to the business in consideration of the basis or objective of the introduction of GST.
> Input Tax Credit on Employee welfare expenses during Lockdown
India has been dealing with this pandemic proactively. Union Government has invoked its powers under the Epidemic Diseases Act, 1897 (hereinafter referred to as “EDA”) and Disaster Management Act 2005 (hereinafter referred to as “DMA”).
Ministry of Home Affairs has issued order No. 40-3/2020-DM-I(A) dated 15th April, 2020 under provisions of DMA, effective from 20th April, 2020, for containment of epidemic in the country that includes the Standard Operating Procedure (SOP) for social distancing for offices, workplace, Factories and Establishment.
The above guidelines require a business to make necessary arrangements for the restart of their business operations. The businesses may require incurring various natures of expenses which could be primarily below:
As per section 16 of the CGST Act, 2017, ITC of taxes paid on expenses incurred for an employee is allowed, if made in the course or furtherance of business provided all other conditions as prescribed are also fulfilled.
Further, Section 17(5) stipulates the category of expenses on which ITC is not available as per GST Act, 2017. However, it also provides an exception to the above, 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.”
Based on the above, ITC of tax paid on each expense incurred for employees should be analyzed in detail in consideration of government obligation to incur such expense as per MHA guidelines under DMA.