GST Input Tax Credit on expenses incurred to contain Corona-virus - CA. Keshav R Garg

GST Input Tax Credit on expenses incurred to contain Coronavirus

Most of the GST taxpayers are getting their office premises/building sanitized and special arrangements are being made to ensure proper hygiene to avoid spread of Covid-19 amongst the employees. Moreover most of the companies are taking special consideration for their employees who had recently traveled from outside India.

Now the question arises whether credit of input tax paid on the expenses made to avoid spread of disease would be eligible or not and whether if the taxpayer is an exporter or supplier to SEZ unit, whether he will be eligible for refund under GST Act or not.

The provisions of Input Tax Credit are governed by Section 16 read with Section 17(5) of the CGST Act 2017. Under normal circumstances a taxpayer certainly fulfills the conditions prescribed u/s 16(2) of the CGST Act 2017 which are as under:

(a)  He is in possession of a tax invoice

(b) He has received the goods/services

(c)  Tax has been actually paid to the government

(d) He has furnished the return under section 39.

Though the conditions under section 16 are fulfilled, Section 17(5) places a restriction on Availment of input tax credit in case of :

(g) goods or services or both used for personal consumption.

This would mean that where a taxpayer uses goods/services for personal consumption either for himself or for his staff members, no input tax credit would be permissible. On this pretext expenses made on staff welfare including expenses on refreshment, playing area etc. are not permitted under GST Law.

In the case of Chennai Port Trust 2019(28) GSTL 600 (AAR-GST) authority for advance ruling has held that the credit in respect of inward supply of medical, diagnostic equipment, apparatus etc. used in own house hospital for the treatment of employees shall be treated to have been used for personal consumption and hence credit shall not be permitted as per section 17(5)(g).

As per Black’s Law Dictionary, term “personal” means “of or constituting personal property and term “consumption” means the use of thing in a way that thereby exhausts it. The term “welfare” means well being in any respect; prosperity.

It shall certainly be point of debate whether expenses incurred for containing the spread of a disease which has been classified as an epidemic should be classified as Staff welfare or not. Given the present situation prevalent across the globe, it must be understood that these expenses are incurred out of compulsion instead of a routine activity. Though it can be considered to be for welfare of employees but the very fact that such expenses are necessary for continued operations cannot be ignored.

Since in most of the states, coronavirus has been classified as epidemics under Epidemics Diseases Act 1897, any action performed under these circumstances shall be treated as a statutory obligation instead of voluntary care and welfare.

As per Covid-19 Regulations 2020, Covid-19 means The Coronavirus disease caused by Severe Acute Respiratory Syndrome Coronavirus 2 (SARS CoV2) as defined by World Health Organisation. Various state government under the powers vested by Covid-19 regulations 2020, have issued guidelines/instructions to employers/companies/institutions to carry out sanitation in their premises. Under these circumstances, expenses made on such activities shall be treated as an obligation instead of pure staff welfare.

Further, Clause 11 of the Covid-19 Regulations 2020 provides that any person/institution/organisation found violating any provisions of these regulations shall be deemed to have committed an offence punishable under section 188 of Indian Penal Code (45 of 1860). Empowered officers may penalize any person/institution/organisation found violating provisions of these regulations or any further orders issued by Government under these regulations.

Now since the expenses incurred towards containing the spread of disease either for travel, quarantine, sanitizing the premises etc. is a statutory obligation and is a punishable offence, the restriction imposed under Section 17(5) (g) cannot be applied for admissibility of Input Tax Credit as it tends to bar only those personal consumption which have been done without any obligation of law.

Hence under these circumstances, ITC should be permitted for expenses incurred for containing        Covid-19 and consequentially refunded in case of exporters.

Keshav R Garg

(B.Com, FCA, CS, ISA (ICAI), LLB)

3328, First Floor, Sector 27 D, Chandigarh, INDIA 160019

Phones: +91-172-461-3328, +91-98880-90008

E-mail: keshavgarg@kdai.in