This brief article explores items on which GST Input tax credits are disallowed in general and how this affects professionals in particular on a day to day basis.
Imagine Chandra is the audit partner in a firm of accountants. When working at clients’ premises, he often visits restaurants for lunch, usually accompanied by a member of his audit team (employee), and one or two people of the company that he is auditing at the time (client). Can input tax can be claimed on the lunch costs? The answer is, no. Input tax credits are not allowed on Food and Beverages under GST regime.
Professionals agree items such as food and beverages, local conveyance, travel, employee engagement etc. form an integral part of their total cost of operation. If principles of GST were to be revered in its true spirit, then non availability of input tax credits on essential day-to-day items for conduct of the profession appears to skew the fundamental proposition under GST.
Imagine another situation where there is a meeting with a client. If basic food and refreshments such as sandwiches, coffee, tea and soft drinks are provided in the office during a meeting to enable the meeting to proceed without interruption, it would be most essential to conduct the business. Denial of input tax credits effectively increases the cost of operations in such cases.
Items of expenses such as local conveyance and travel are elementary costs for a professional. A chartered accountant usually deploys his staff at multiple client places for audit in the usual course. Similarly, a consultant may have to travel almost on a regular basis to have discussions with her clients. Imagine, an enthusiastic young professional, motivated by “Start-up” bug and considers setting up her firm. She has primarily two options to meet her clients (a) Rent a cab based on the need or (b) Buy a car for the local travel. Input tax on rent a cab cannot be availed as Input tax credits. This means she cannot hire Uber or Ola and expect input GST to set off against output GST. If she buys a car for professional usage, even then no input tax is allowed. One would wonder is this the way GST must operate qua professionals?
Let me also give you the other side of the story. Input taxes on items discussed above are mostly items of personal consumption. Such items of inputs bear no direct relationship with the output service offered by the professional. It is hard to segregate element of private benefit from business usage, in such cases. If input taxes are allowed to be set off (for items discussed above), then, it may lead to unethical practices and ultimately result in tax evasion as well. Countries like UK, France, Belgium and other EU countries have similar restrictions in their local VAT regime.
What should the Government do? In my view, the Government should be open to consider the realities of professionals with a pragmatic approach. It is accepted that segregation of use for business purposes versus private benefit is difficult and impractical in most cases. So, why Government cannot come up with a percentage disallowance say 25% or 30% for private use and allow the rest as ITC? The percentage so determined should take into account ground realities and practices among professionals and should be not be arbitrary.
Input taxes are allowed in the UK for business entertainment to overseas customers (link). Similarly, where an employer provides entertainment for the benefit of employees, for example to reward them for good work or to maintain and improve staff morale, it does so wholly for business purposes. Thus the VAT incurred on entertainment for employees for example staff parties, team building exercises, staff outings and similar events is input tax and is not blocked from recovery under the business entertainment rules.
To start with, Government can consider partial allowance of input tax credits on rent a cab for professionals. Another area could be to allow input tax credits on employee engagement with adequate safeguards/ conditions.
When the country is embarking upon an era of transparent tax administration, belief in tax payers (as opposed to treating them as crooks), non- harassment, Start-up India, Make in India kind of initiatives, it is of utmost importance to recognize the pains of professionals operating at grass root levels. The intent of this write-up is not to advocate 100% input tax claims to be allowed on all and sundry items of cost. But, it is sensible to recognize there is merit in allowing input tax credits on some items of cost that are indispensable for conduct of the profession, which are completely disallowed as of today.
Views expressed in this article are personal
Author: Guruprasad K S
PS: I write this is because professionals are too busy advising others about GST, someone should watch their back, isn’t it?