ITC eligibility and outward taxability under GST law of the benefits granted by the employer to the employee during COVID-19 pandemic

This is an attempt to briefly discuss the provisions with regards to claiming of input tax credit and subsequent levy as outward supply under GST law of the benefits/facilities granted by the employer to the employee during COVID-19 pandemic under GST regime: 

Brief background: 

Considering the COVID-19 pandemic, a lot of charitable work has been going on since past over a year now (March 2020 onwards). However, major risk to human life has been caused by the unprecedented appearance and multi-fold rise in the spread and surge of latest mutant starting from the end of March 2021 (often called as second wave of COVID-19 pandemic) and an overwhelming pressure upon the existing infrastructural facilities in the health sector had made the situation much more grave and difficult to handle with regards to availability of life saving facilities.

In order to tackle the havoc of this mutant, much contribution has been made by various governments, charitable trusts, organizations, individuals and various employers as a part of their social responsibility. Many employers have also come forward and extended a helping hand for providing various and in fact all possible benefits in the nature of life saving supplies to its employees and their immediate dependents, some of them being:

  • Oxygen Concentrators
  • Quarantine/Isolation Centre facility
  • Ambulance services
  • Doctor consultancy/ Health Consultancy
  • Oxygen refill, Oxygen pipes etc.
  • Enrolment to mental and spiritual programmes
  • Vaccination for employees, their dependents
  • Vaccination for intra-group company employees
  • Insurance coverage like benevolent funds for employees succumbing to COVID-19 virus
  • Essential medicines like Paracetamol, Favipiravir, Ivermectin etc.
  • Medical equipment like Oximeter, Flowmeter etc. 

Aforesaid benefits are either being provided free of charge to the beneficiaries or at a subsidized price wherein part cost is borne by the employer himself, mainly channelizing through either of the below two models:

  • Direct procurement by the employer with invoice in its name and then transfer to employee for usage with no or partial recovery from the employee or
  • Reimbursement model wherein employee themselves procure the supplies and employers reimburse them with the cost either partly or fully as per the arrangement. 

Taxability of COVID-19 relief supplies:

In view of the COVID-19 pandemic, exemption from the Basic Customs Duty and/or Health cess on imports of a number of COVID-19 related relief materials, has been granted for a limited period to certain goods vide below notifications:

Notification Particulars
27/2021-Customs dated 20.04.21 (as amended by notification No.29/2021-Customs dated 30.4.21) Remdesivir injection/ API and Beta Cyclodextrin (SBEBCD), Inflammatory diagnostic (markers) kits, till 31st October,2021
28/2021-Customs dated 240.4.21 Medical grade Oxygen, oxygen therapy related equipment such as oxygen concentrators, cryogenic transport tanks, etc., and COVID-19 vaccines till 31st July, 2021

In furtherance to above, Department of Revenue under Ministry of Finance has issued an Ad hoc Exemption Order No. 4/2021-Customs on 3rd May 2021 for granting exemption from IGST on import of such goods received free of cost for free distribution.

It is pertinent to mention here that aforementioned exemptions have only been provided with respect to the supplies procured from outside India for distributing within India under the compliance with prescribed procedures as are listed under the respective notifications and orders.

Meaning thereby that, no exemption has been provided with respect to the procurements and supplies made within the territory of India and thus the question with regards to claiming of Input Tax Credit and levy of GST as outward supply arises as follows:

ITC eligibility:

Provisions with respect to ‘Eligibility and conditions for taking input tax credit’ are governed by section 16 of the CGST Act as follows: 

‘(1) 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 ………… 

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless:

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(b) he has received the goods or services or both 

Explanation: For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services:

    • where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise
    • …….’

Thus, going by the virtue of above provisions, question of ITC eligibility shall not arise under model (b) elucidated above, wherein ‘Employee themselves procure the supplies and employers reimburse them with the cost either partly or fully as per the arrangement’ since the condition that registered person shall be in possession of a tax invoice does not gets complied with.

Therefore, the below discussion with regards to ITC eligibility is for model (a) i.e. ‘direct procurement by the employer with invoice in its name and then transfer to employee for usage with no or partial recovery from the employee’ only:

As mentioned supra, section 16(1) of the CGST Act provides that taxpayer may claim ITC on all supplies which are used or intended to be used in the course or furtherance of business.

Further, the term business has been defined under section 2(17) of the CGST Act to mean and include:

  • any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit.
  • any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
  • any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction



Considering this COVID-19 situation to be an unprecedented one and a business exigency in nature and providing of underlined essential facilities to the beneficiaries (both employees and their dependents) would only help the taxpayer in continuance of its business operations, one may take a view that incurrence of the said expenses was necessary in order to endure the continuance of the business needs and therefore, the ITC on these supplies falls within the ambit of section 16(1) and thus, credit shall be allowed.

Further, the contribution with the likes of these facilities only help in improving the goodwill and business reputation of the company that ultimately contributes as a booster to business growth.

With respect to ITC eligibility, a restriction has been provided u/s 17(5) of CGST Act 2017 for availment of ITC on supplies used for personal consumption subject to certain legal obligations if any imposed upon the employer to provide the same.

Although, there are no legal obligations upon the employer to provide these facilities to the beneficiaries, however, the same can be covered under the ambit of socio-moral responsibilities and obligations and as mentioned above, business exigency supersedes any other obligations since continuance of business operations without incurrence of these expenses would be practically impossible in light of current situation and thus, ITC may be claimed in this case by the employer on most of the facilities subject to fulfilment of other conditions as per GST law.

However, authority might take an alternative view that since there was no legal obligation on the taxpayer to provide such supplies to its employees and that the same are used for personal consumption, ITC shall be restricted u/s 17(5).

Outward taxable supplies: 

Section 7(1) of CGST Act provides the definition and scope of supply and includes certain activities listed in Schedule I even when made without consideration and as per entry no. 2 to this schedule:

activities between related persons (including employees) when made in the course or furtherance of business shall be a supply. Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.’

As per section 2(83) of the CGST Act: ‘outward supply in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, license, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business.’

For any activity to constitute as a supply, there must be the existence of some contractual obligations imposed on either of the party to the contract either implied or expressed. However, in our understanding, underlined facilities being provided by the taxpayers (employers) are on ‘take it or leave it’, basis which one may infer that employer is under no legal obligation to render the same to the beneficiaries and thus, the same does not fall under the definition of supply, there itself getting excluded from the ambit of Schedule I.

Further to substantiate our claim, in our view, above facilities being provided by the employer to beneficiaries are in the nature of common facilities because of HR policy and that the same may be treated to be provided by the employer under the course of his contractual obligation with the employee, either expressed or implied and treatment and deduction as ‘cost to company’ (CTC) under Income Tax Act, 1961 which are excluded from being treated as a supply of goods or services or both as per entry no. 1 to Schedule III.

Also, one may take a standpoint that provision of most of the underlined facilities have been under regulatory restrictions and that company is not in a position to render such supplies and facilitating these is only acting a mediator in this case and no real supply is rendered.

However, GST authorities might cover the said rendering of facilities under the Schedule I and therefore under the definition of ‘supply’ and consequently levy GST as per appropriate rate of tax and other provisions.


With respect to ITC eligibility on procurements for intra-group company employees, in a case where there is no recovery, in our view, ITC may not be allowed considering this not to be used for the taxpayer’s business directly or even indirectly.

Further, with regards to treatment of this as an outward supply, in our view, in order to constitute a supply, there must be a quid pro quo and a contractual obligation and, since the same is not present in this case, no outward supply seems to happen and therefore no levy under GST law.

However, authorities might take either of the below two counter views with regards to this activity:

1. Treat supply of procurement to intra-company as supply in the nature of facilitation/support service and thus liable to 18% GST

2. Treat supply of procurements and taxable at respective tax rates (this view is less likely to be taken as most of the COVID-19 relief materials have been subjected to regulations and restrictions as per respective medicinal and drug supply laws in force)

In both the above cases, in our view, company can choose to claim ITC of GST paid on procurements.

In case the employer chooses to recover the cost (fully/non-subsidized or partially/subsidized) from the employees, then the same shall qualify as a supply from employer to employee to the extent of such recovery and valuation needs to be done in accordance with Rule 28, CGST Rules. Basis our discussion over call, we understand that company is not recovering any cost form employees and below facilities are provided free of charge.


Thus, in our view, this is an exceptional situation and no specific provisions have provided under the entire GST law and therefore, the tax positions are to be taken with utmost cognizance of the case in hand and GST authorities and the CBIC (Board) are also expected to take a lenient view in terms of non-levy of tax and eligibility of ITC in this case considering this to be the need of the hour and a cause and consequence to the continuance of business operations.

Also, it is to be noted that GST authorities might take a contrary view and question the admissibility of the ITC and non-taxability of activities as an outward supply under GST law. However, in our view and basis the related precedents and pronouncements in the past, relief can be expected to be granted at the higher forums considering COVID-19 to be an exceptional and one of its own kind situations.


Should you require any clarification, please feel free to revert back in the comment section.

Note: These are author’s individual views and the above writeup shall be used for reference purposes only. Any commercial/legal/financial decision shall be made after undertaking due consultation with your tax consultants and jurisdictional tax authorities and author shall not be held responsible for any future consequential liability.

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June 2021