ITC on expenses incurred on account of Covid-19 under GST Act

The whole world is facing huge crisis due to COVID-19 pandemic. Human safety and welfare has been put on higher risk. As per current situation and taking care of human safety, we can say that Masks, Gloves, Sanitizer and other safety equipments are as important as food and shelter for individuals to live.

Our Hon’ble Prime Minister has personally urged to citizens as well as businesses to support country to fight against COVID-19 pandemic. Many of the businesses and individuals have contributed fund as per their capacity towards PM Care’s Fund.

Some of the guidelines have also been given to industrial and commercial establishments, workplaces, offices, which are mandatory to follow if they restart their business operation during/after lockdown period. Such guidelines has been issued by the Ministry of Home Affairs (MHA) firstly vide order no. 40-3/2020-DM-I(A) dated 15.04.20 w.e.f 20.04.20  and later as on date 01.05.20 and date 17.05.20 which are as below;

1. Medical insurance for workers to be made mandatory (Revoked w.e.f 05.20 as per order dated 17.05.20)

2. Wearing face cover to be made compulsory

3. To have temperature screening and provide sanitizers at convenient places

4. To Sanitize workplaces between shifts and frequent sanitization of entire office, common office and all point which came into human contact

5. All areas of the premises to be disinfected

6. Special Transportation facility to be arranged for workers coming outside without dependency of public transport

7. Communication and training on good hygiene practices  shall be taken up

Once side due to lockdown, operating cycle of businesses has become very slow, organizations are facing liquidity crunch and on other side they are under obligation to take above preventive measurements to fight against COVID-19 which results in increase of cost.  A Question may arise that

Q Is input tax credit on expenses incurred on account of COVID-19 is eligible?  

Ans: Yes. It is eligible.

Let we refer to the different relevant points for more understanding.

• Provisions of GST Law:

Section 16 of CGST Act,2017 says that every registered person shall  be entitled to take credit of input tax charged on any supply of goods or services or both 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.

However, Section 17(5) of CGST Act,2017 blocks the amount of input tax credit of certain goods or services that cannot be availed by a registered taxpayer even though these goods or services are used or intended to be used for the furtherance of business.

As per Section 17(5)(b) of CGST Act 2017 provides input tax credit is ineligible on services of rent-a-cab, life insurance and health insurance except where the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force

Hence, it makes clear that input tax credit of services specified in section 17(5)(b) ineligible until they are obligatory in nature. Taxpayers need to determine from different acts if government has notified such services mandatory in nature for them.

• Order of MHA and Overriding Effect of Disaster Management Act,2005

Clause No.5 of Annexure-II of the Order No. 40-3/2020-DM-I (A) dated 15th April 2020 issued by MHA has made medical insurance mandatory of workers. (Later, in order dated 17.05.20 effect from 18.05.20 obligation to take medical insurance mandatorily was ceased)

Further, the guidelines of MHA issued under the powers conferred under Section 10(2)(l) of the Disaster Management Act, 2005 and as per section 72 in Disaster Management Act,2005 states that act to have overriding effect. The provisions of this Act shall have the effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.

Thus, we can say that input tax credit on services/expenses which was blocked before order of MHA is now could be claimed as such services are obligatory in nature for taxpayers.

• List of Expenses and Eligibility of ITC

Let we refer below table for understanding of eligibility of ITC of expenses incurred on account of COVID-19 taking in a view of MHA Guidelines;

• Important Points to be considered

–  ITC is eligible for temporary period only. All the orders of MHA need to be read and understand.

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

–  MHA order states that Medical Insurance is mandatory for worker. As neither the guidelines nor in the act provides definition of worker. Insurance for all workers is must for reopening of operation. It would not be appropriate to think that workers mean only who work in factory/production area. Hence, it must include all the employees including contractual workers.

–  Insurance policy taken by company must be in name of company only.

–  ITC is eligible only if there is no recovery of expenses from the employees/workers by the company.

• Clarification on CSR Expenditure related to COVID-19 (Additional point for knowledge) 

The Ministry of Corporate Affairs vide circular no. 15/2020 date 10.04.2018 clarified many points related to spending of money to contribution to various types of funds for COVID-19 and activities related to COVID-19. For more understandings, refer below table;

Conclusion:

Companies need to examine all the expenditures specially related to employee welfare and safety and should evaluate eligibility of input tax credit considering obligations imposed by MHA. It may happen that department has different point of view on some credits. Hence, once need to examine all related aspects and facts of the businesses before come to final decision.