There is diverse interpretation in industry with respect to clauses for restricted input tax credit (ITC) under section 17(5) of Central GST Act, 2017. This article intends to put some light on one of important clause dealing with personal consumption with some legal precedent from erstwhile indirect tax regime.
The relevant extract of legal provision is reproduced hereunder-
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-
By reading above provision, no ITC shall be allowed where supply is used for personal consumption, however, nowhere in GST law the term ‘personal consumption’ is defined. In such circumstances, we may refer to settled legal principles under erstwhile indirect taxation regime. Based on such principles we may draw reasonable conclusion under current law.
Earlier input tax credit was governed CENVAT Rules, 2004 (Central Government) wherein similar term was used in definition of “input” and “input service”. As per CENVAT Rules, tax paid on input and input service shall be available as credit which can be utilised for discharging output tax. However, following two important point must be noted-
We may observe that even under erstwhile law no ITC was allowed on goods or services used for personal consumption of employee. Thus, any settled principles in this regard would squarely be applicable in GST law.
The exclusion part in definition of “input” and “input service” is made with effect from 1 April 2011, At the time of introduction of such amendment Government has issued Circular D.O.F. No.334/3/2011-TRU dated 28 February 2011 which highlights amendment to be made along with clarification. Annexure C of said circular contains important changes in CENVAT Rules, 2004 and the relevant text under Point no.1.5 and 1.9 is reproduced as under-
1.5 Exclusions also cover goods such as food items, goods used in a guesthouse, residential colony, club or a recreational facility or a clinical establishment which are primarily meant for the personal use or consumption of the employees. When any of these goods are used directly in the manufacture of final products or provision of a service they will constitute input.
1.9 On the same lines, a service meant primarily for the personal use or consumption of employees will not constitute an input service. A list of specific services has also been given by way of example in the definition. Most of these services constitute a part of the cost-to-company package of the employee and are provided either free of charge or on concessional basis to company employees.
Based on above, we may infer that cost which shall be part of employee benefit expenditure shall be considered as personal consumption by employee. On other side, if such cost is borne by company as business expenditure then ITC shall be allowed. Further, Indian judiciary system has also delivered some judgement on this aspect.
In case of Reliance Industries Ltd. Vs. Commissioner, Central Excise & Service Tax (LTU), Mumbai [2015 (11) TMI 969] Mumbai CESTAT has held that service tax paid on group insurance premium for employee shall be treated as input service and not services used primarily personal use or consumption of employee. Accordingly, CENVAT credit shall be allowed.
In case of Hindustan Coca Cola Beverages Pvt Ltd. Vs. Commissioner of Central Excise, Nashik [2014(12) TMI 596] Mumbai CESTAT held that outdoor catering is input service and eligible for CENVAT where cost of such service is borne by company.
Based on above discussion, we may draw similar analogy for provision under GST law for interpreting the term “personal consumption”. Although we may notice that list of ineligible credit under GST law is same as list under CENVAT Rules except with the phrase “when such goods or services are used primarily for personal use or consumption by employee” Therefore, a view may be taken that under GST law all such credits shall be ineligible whether or not primarily used or consumed by employee.
In my view, only those supply where cost is incurred in the form of agreed compensation to be paid by company and not essentially required for running concerned business shall be treated as personal consumption. Following may be considered are example for personal consumption-
Generally residential cost to be borne by employee himself, however, here his cost is borne by company due to employment contract term.
Some part of mobile usage would be definitely personal purpose but entire cost is borne by company.
Travelling cost to be borne by employee himself but here same is borne by company.
Such facility is given as perquisite to director which clearly involves personal nature also.
Above view expressed is of my personal, based on understanding of legislation and practical experience thereto. A person may have difference view on the subject matter and may not subscribe to this view. Further, this shall, in no manner, be considered as legal opinion or advise as it is just for educational purpose.