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Regardless of whether it is incurred for employees or social causes, Input Tax Credit (ITC) being the backbone of GST is a major matter of concern for taxpayers incurring COVID-19 related expenditure. The aforesaid scenario has put questions in mind of organizations that whether ITC can be availed of such expenditure incurred? The question that remains largely unanswered has been the subject of widespread debate in the current context.
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With India continuing to reel under COVID-19 infections, the term essentials not just imply ‘Roti, Kapda and Makaan’ but has likewise brought within its sphere masks, sanitizer, gloves and many other protective equipment. Corporates are being urged to undertake welfare measures for employees thereby ensuring their well-being and to also support society at large in fighting against this pandemic by providing donations in COVID relief reserves, clinical helps and so forth. This has prompted a sharp rise in expenses of corporates involved in this endeavor.

Regardless of whether it is incurred for employees or social causes, Input Tax Credit (ITC) being the backbone of GST is a major matter of concern for taxpayers incurring COVID-19 related expenditure. The aforesaid scenario has put questions in mind of organizations that whether ITC can be availed of such expenditure incurred? The question that remains largely unanswered has been the subject of widespread debate in the current context.

Analysis of ITC eligibility of said expenses requires deliberation on two fundamental angles, one being whether said expenses can be accounted as incurred “in course or furtherance of business” and second, whether there is any specific forbiddance under ITC provisions of GST law.

The expression “in course or furtherance of business” is not defined under the GST law however might be perceived in general as any activity which is required to be performed for smooth working of business.

Same school of thought was also put forward by Hon’ble Supreme Court in case of Malayalam Plantations Limited wherein activities done for preservation/protection of business assets were viewed to be done for the “purpose of business”. Employees are any organizations’ most valuable assets and essential for its smooth running, expenses incurred for their wellbeing and safety from COVID-19 may be derived to as brought in course or furtherance of business.

Moreover, GST law bars availing ITC against goods/services consumed personally. However, it is crucial to ponder thoughts on whether expenses incurred for preventing spread of disease which is declared as epidemic should be classified as for personal purpose? The terms ‘personal’ & ‘consumption’ in general means ‘of constituting personal property’ and ‘use of thing in a way that thereby exhausts it’ respectively. Considering the same, applicability of the term ‘goods or services used for personal consumption’ in case of corporates indulging in protecting their hired hands by providing oxygen concentrator/cylinder etc. on a use-return basis may need a second check. Another way of looking at these expenses is that these are similar in nature to other office consumables used personally by an employee like furniture, air-conditioners etc. ITC on which has never been in question.

Given the present situation prevalent across the globe, instead of looking at such expenses strictly through the lens of the term “personal consumption” the Government of India (GOI) may consider it as an inevitable expenditure for continued business operations and provide suitable clarification in this regard.

Additionally, during these times organizations are also shelling out huge sums of money to provide aid to society at large. Recently GOI has allowed categorization of certain spending as Corporate Social Responsibility (CSR). Various deliberations have been made regarding ITC eligibility on CSR expenditure under the Indirect tax laws. However, contrary rulings in this regard by GST authorities in different states have left traders befuddled. As per one view, these are in nature of gift and thus ITC shall not be allowed due to a specific restriction under ITC provisions of GST law. On the other hand, few rulings relied on the definition of ‘gift’ in common parlance i.e., anything provided occasionally and voluntarily, without any consideration and held that CSR is not charity/gift anymore, it augments credit rating/standing of company in corporate world and is compulsorily required to undertaken. Thus, ITC on the same must be allowed.

Such divergent/incongruent advance rulings as regard to CSR expenditure, being a clear business spending, is surely creating a room for uncertainty amongst taxpayer’s minds. In order to put the ambiguity around interpretation of law to rest and to avoid unwarranted litigation, GOI may consider issuing suitable clarification. This will reduce some cost on part of the taxpayers and will in turn encourage them to come forward and donate generously for this noble cause.

Bearing in mind, sensitivity of this matter and looking at hardships driven in the current pandemic situation, it is need of the hour that GOI proactively provide a helping hand by relaxing legislative provisions on both these aspects thereby encouraging businesses to drive their contribution to employees’ protection and welfare of society at large.

This article was originally published in Business Standard.