Now ITC can be availed which was earlier blocked on Health-Insurance and hiring of motor vehicle for transportation of employees from 15th April 2020
Due to COVID-19 epidemic in the country, Government has made certain services obligatory for employer to provide to its employees. In this article, such categories of supplies have been identified and discussed with respect to eligibility of Input tax credit.
Recently the Ministry of Home Affairs, Government of India has issued guidelines for containment of COVID-19 epidemic in the country vide notification No. 40-3/2020-DM-I(A) dated 15.4.2020 in exercise of the powers, conferred under Section 10(2)(1) of the Disaster Management Act 2005. The said notification also provides Standard Operating Procedure (SOP) for Social Distancing for Offices, Workplace, Factories and Establishments.
The notification also mandates the transportation facility by special vehicles for workers coming from outside without any dependency on the public transport system and these vehicles are allowed to work only with 30-40% passenger capacity. Further, Medical insurance are also made mandatory for the workers.
Accordingly, it can be seen that transportation service and Health insurance service has become obligatory for an employer to provide to its employees under Disaster Management Act 2005.
From 1st February 2019, there are few important changes made in the input tax credit restrictions provided in Section 17(5) of CGST Act 2017.
Input tax credit on employee expenses have always been subject matter of debate and in most instances, the credits have been disallowed. However, Inputs or services which are obligatory for employer to provide to employees under any law for the time being in force being allowed.
Clause (b) of Section 17(5) has listed certain goods / services for ITC restriction which includes few related to use of employees. Extract of section 17(5) is reproduced as follows:–
Section 17(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—
(b) the following supply of goods or services or both—
(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance;
Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;
(ii) membership of a club, health and fitness center; and
(iii) travel benefit’s extended to employees on vacation such as leave or home travel concession;
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.”
It is evident from the last proviso that ITC in respect to above goods and services shall be available where it becomes obligatory under any law for the time being in force for an employer to provide the same to its employees.
In view of the above discussion, it can be concluded that though the ITC on hiring of motor vehicle and health insurance are blocked vide clause (b) of section 17(5) but proviso to this clause also provides the exception that that ITC in respect to services shall be available where it becomes obligatory under any law for the time being in force for an employer to provide the same to its employees.
However, as per MHA order dated 17.5.2020 all earlier MHA orders ceases to have effect from 18.05.2020 and there is no guideline for mandatory health insurance of workers from 18.05.2020. Hence, the medical insurance was obligatory only from 15.4.2020 to 17.5.2020. Premium paid otherwise than in this period would not be eligible.
Therefore, the ITC shall be available on the expense incurred due to mandatory obligation under Disaster Management Act 2005 for transportation service and health insurance service provided to its employees.
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Disclaimer: The opinion is based on my understanding of law and regulation prevailing as on the date. There is no assurance that the Revenue Authorities will agree to the view expressed above. Further, the views, thoughts, and opinions expressed in this article belong solely to the author, and not necessarily represent or reflect the views of the author’s employer, organization, or other group or individual.