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ITC Eligibility and Outward Taxability under GST


Since 2020, our economy, along with the world economy, has been facing a slowdown, and people even find it difficult to meet their day-to-day expenses and other fixed expenses due to the COVID-19 pandemic; the whole situation is getting crucial. There have been many activities taking place with the assistance of various charitable organizations and other NGOs, along with the major business entities, for the betterment of the economy. The cases started surging in March 2021 because of a new mutant virus.

Both individuals and the biggest corporate employers started coming forward to help the people and the health care sectors along with the government to improve the condition and help many who are ailing from the disease as a token of social responsibility adherence towards the society and its people. In the middle of this, there were employers who started assisting their employees with regard to any benefits that can be provided by them to the employees and their direct dependents or relatives which ranges from providing isolation centre facility, doctor or health consultancy, oxygen pipes and refills, insurance coverage including benevolent funds for employees who have succumbed to the virus, essential medical supplies, and such other aids.

The employers provided such services either free of cost or at discounted or subsidized prices where the cost or part of the cost was borne by the employer for the employee. For this, they chose either of the below mentioned two methods:

  1. Procured directly by the employee with the invoice made in the employer’s name and transferred to the respective employees for usage with no or partial recovery of the cost from such employee,
  2. The employee procures the supplies and the invoice is submitted to the employer who would then reimburse the employees with full or partial cost as per the arrangement.

Taxability of COVID-19 Relief Supplies

Through the Notification No. 27/2021- Customs which was holding the date 20.04.2021(as amended by notification No.29/2021-Customs dated 30.4.21) and Notification No. 28/2021-Customs dated 24.04.2021 have exempted, Remdesivir injection/ API and Beta Cyclodextrin (SBEBCD), Inflammatory diagnostic (markers) kits, till 31st October 2021 and medical-grade Oxygen, oxygen therapy-related equipment such as oxygen concentrators, cryogenic transport tanks, etc., and COVID-19 vaccines till 31st July 2021 from Basic Customs Duty (BCD) and Health Cess on imports for a limited period.

Along with this, through Exemption Order No. 4/2021-Customs on 3rd May 2021, the Department of Revenue under the Ministry of Finance has allowed exemption from IGST on the import of such goods received free of cost for free distribution (which is an ad hoc exemption).

Thus, it is to be noted these exemptions are allowed with respect to supplies that are procured from outside India for being distributed within India on the basis of the proper compliance with procedures that are prescribed or listed under respective notifications or the orders pertaining to the same. So, it is clear that with respect to any procurement and supplies which are made within the territory of India, it shall not enjoy any such exemptions.

Eligibility to claim ITC

Under the GST Act, the provisions related to eligibility and conditions for taking ITC are governed under section 16. This states that:

(1) All the taxpayers or the registered persons shall, referring to the conditions and restrictions as may be specified and, in the manner specified in GST section 49, be entitled to take the credit of ITC or the credit of input tax charged on any sale of goods or services or both to him 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 under the GST Portal.

(2) Not considering anything which is given in this section as specified, no taxpayer or the registered person shall be able to avail the credit of any input tax or ITC in respect of any sale of the goods or services or both to him unless ––

  1. he has in hand the tax invoice or debit note issued by a supplier registered under the GST Act or such other documents pertaining to payment of tax as may be prescribed;
  2. he has got the goods or services or both delivered;
  3. Explanation. – For the purpose of this clause, it shall be supposed or deemed that the taxpayer or the registered person has received the goods where the goods are delivered by the seller to a buyer or any other person on the direction of such taxable person or the registered person, whether acting as an agent or otherwise, before or during moving of the products or goods, either by way of transfer of documents pertaining to the title to goods or otherwise;
  4. subject to the GST Act section 41, the tax which has been charged in respect of such sale has been actually paid to the Government, in cash or through the utilization of the ITC or input tax credit available and also admissible in respect of the sale specified above; and
  5. he has provided the return under section 39:

It is provided that where the products or goods sold against an invoice are received in different lots or instalments, the registered or a taxable person shall be entitled to take credit upon receipt of the last lot or instalment as the case may be:

Provided further that where a receiver fails to pay to the distributor of goods or services or both, other than the sales on which tax is payable on an RCM or which is a reverse charge mechanism, the amount towards the value of supply along with tax payable thereon within a period of 180 days from the date of issue of invoice by the seller or the distributor, an amount equal to the ITC or input tax credit availed by the receiver or buyer shall be added to his output tax payable or the liability arising, along with any interest applicable thereon, in such manner as may be specified:

Provided also that the receiver shall be entitled to avail the ITC or the credit of input tax available on payment made by him of the amount towards the value of sale of goods or services or both along with tax or GST which is payable thereon.

Hence, keeping the above-said provisions of section 16 of the CGST Act in light, we can say that the questions of eligibility regarding the availing of ITC shall not arise in a case where the “b. The employee procures the supplies and invoice is submitted to the employer who would then reimburse the employees with full or partial cost as per the arrangement.”, as the compliance with the requirement that registered person be in possession of tax invoice does not gets complied with here.
Say, Mr X, who is an employee of ABC Limited, which is a registered person under the GST Act, and availed COVID-19 test RTPCR for INR 1500 from a private hospital. He received the invoice from the hospital in his name and made the payment for which he submitted the invoice to ABC Limited, who reimbursed half of such payment, i.e., INR 750. Here, the invoice is in the name of the employee, Mr. X, and not in the name of ABC Limited, which is a registered person under GST. Hence, the availing of ITC shall not be possible or eligible in this case by ABC Limited.
So, now we can have a detailed study regarding the ITC or the Input Tax Credit eligibility with regard to,

  1. Procured directly by the employee with the invoice made in the name of the employer and transferred to the employee in question for usage with no or partial recovery of the cost from such an employee,

As per section 16(1), it has been clearly stated that a taxpayer can claim ITC on all supplies which are used or intended to be used in the course or furtherance of business, which, as per section 2(17), is nothing but,
“business” includes––

  1. the activity done despite the same being for a pecuniary benefit or not;
  2. any activity or transaction which is falling in connection with or as an ancillary to the activity falling under the sub-clause (a);
  3. any activity which is falling in the nature of the one falling under sub-clause (a), whether or not there is a volume, frequency, continuity, or regularity of such transaction as prescribed;
  4. sale or the acquiring of goods, including capital goods and services, in connection with the starting or the closing of business.

Now, considering the current situation of the market, society, and economy, we can say that the COVID-19 virus and the pandemic caused by the same in an unprecedented one as the same is causing instant fluctuations in the functioning of the same. So, we can say that to ensure the smooth and continuous functioning of business during these difficult times, it is vital that the employees and their dependents are provided with essential facilities making such incurrence of expenses like the one for the continuance of business due to which the ITC claiming on such supplies can be availed by taking virtue of section 16(1). This can be seen as a business exigency and compliance with the socio-moral responsibilities of the employer and business. Business exigency would supersede any other obligations as the continuance of business and the assurance of the same without any cost incurrence shall be considered to be impossible.

But the GST Authorities might take a view contrary to the same as there are no legal obligations bestowed on any employer to provide such supplies to their employees, and the same is used for the personal consumption of employees and not for furtherance of business, which has been clearly stated by section 17(5)(h) goods or services or both used for personal consumption shall not be eligible for claiming ITC.

Outward Supplies

Referring to Section 7(1) of the CGST Act, we can say that,

(1) For the virtue of this Act or GST Act, the expression sales or supply would include––
all forms of sale of goods or services or both, including the transfer, barter, license, rental sale, exchange, lease or disposal made or agreed to be made for the payment of consideration by the person in the course or either furtherance of business; the activities that are given in Schedule I, which has been made or agreed to be made without the payment of consideration; and the activities are to be treated as the supply of goods or supply of services as are provided in Schedule II of the Act.

Section 2(83) of the CGST Act provides the meaning of an outward sale in relation to the person who is registered and is to pay tax, as, supply of goods or services or both, whether the transfer, barter, license, rental, sale, exchange, lease or disposal or any other mode, which has been made or agreed to be made by such person in the business or its furtherance.

Thus, taking virtue of the meaning of supply given under these sections, we can say that for an activity to constitute a supply under the GST Act, some contractual obligations must exist that might be expressed or implied. This service of making available such COVID-19-related supplies by the employer to their employees is not a part of any contractual obligations and is only provided on the grounds of social responsibility and moral grounds. Due to this reason, we can say that the same does not come under the ambit of supply.

Here, we can also claim that the company is only functioning as a mediator or is only facilitating such supplies by procuring the supplies and giving the same or reimbursing such bills to the employees as they are not in the position to render such supplies, with no real supply being rendered again putting it from the ambit of supply and the taxability as outward supplies.

Thus, we can conclude that the supply made by employers to the employees are not evidently kept out of the ambit of supply as per the GST Act or made eligible for claiming ITC but the same can be claimed by the taxpayer taking virtue of the GST Act and the respective sections.

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