The tribulations of the COVID-19 pandemic appear to be endless. With the situation evolving daily, hardships faced by people, commerce and industry continue. Industry at large and few sectors (in particular), are still recovering from the shock of the stimulus package related announcements that unfolded last week. Companies are now looking inwards to find ways and means of reducing cash outflows. One key area for cost savings from an indirect tax perspective is identification of unavailed Input Tax Credit (ITC).
Relaxations introduced by the Government amidst the lockdown
'Lockdown' in India has been imposed in phases. While the first two phases sought complete prohibition on all activities, the subsequent phases have provided relaxations for undertaking various economic and non-economic activities. These relaxations are however subject to fulfilling of a number of regulatory conditions prescribed by the Ministry of Home Affairs in various orders issued from time to time.
The Ministry of Home Affairs, through the National Executive Committee, vide order no. 40-3/2020-DM-I(A) dated 15 April 2020, (hereinafter referred to as the 'Order') issued under Disaster Management Act, 2005 (hereinafter referred to as 'DMA'), laid down various guidelines with respect to the activities that shall be permitted and the activities that shall remain prohibited in certain specific areas (non-containment zones) across the country. Offices, workplaces, factories and establishments have been allowed to operate in the non-containment zones subject to conditions prescribed in Annexure II of the order. Relevant extract of the terms and conditions are reproduced below:
"2. For workers coming from outside, special transportation facility will be arranged without any dependency on the public transport system. These vehicles should be allowed to work only with 30-40% passenger capacity
4. Mandatory thermal screening of everyone entering and exiting the workplace to be done
5. Medical insurance for the workers to be made mandatory
6. Provision for hand wash & sanitizer preferably with touch free mechanism will be made at all entry and exit points and common areas. Sufficient quantities of all the items should be available."
Hence, in order to operate factories, establishments and offices during the lockdown, it would be mandatory for businesses to comply with various conditions, failing which, penal provisions may be invoked under Disaster Management Act.
Analysis of the relaxations in the Order in light of ITC provisions under GST law
Section 16 of Central Goods & Services Tax Act, 2017 ('CGST Act') stipulates that input tax credit shall be available to a taxpayer on supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business.
Further, Section 17(5) contains a non-obstante clause which provides that the ITC in respect of certain supplies shall not be available irrespective of any other provision contained in the CGST Act. Clause (b) of Section 17(5) states the following -
"(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 it is obligatory for an employer to provide the same to its employees under any law for the time being in force" [Emphasis supplied]
It must be noted that the availability of CENVAT credit on purchase of sanitizers, soaps and other articles of hygiene of employees have long been a matter of dispute by the Revenue on the ground that such purchases are used for personal consumption of employees and not for the purpose of business. However, since the availability of such items are mandated as per an Order issued by MHA, it may be said that ITC of GST paid on such products shall be undisputedly available to all taxpayers.
Further, on reading of clause (b) of Section 17(5), it is clear that ITC of GST paid on the input services of health services, health insurance and leasing and hiring of motor vehicles shall be available only if it is obligatory under any law for an employer to provide the said services to its employees.
It must be noted that the aforesaid Order has been issued by MHA under the powers conferred to the National Executive Committee under Section 10(2)(l) of DMA. Hence, it is amply clear that in order to operate offices, establishments, factories etc. during the lockdown period, it is legally mandatory for the employers to provide, transportation and health insurance services to its employees. Hence, from a cumulative reading of the stipulations of the Order and the provisions of CGST Act, it may be concluded that the credit of the following supplies shall be available to an employer -
- Renting of vehicles for transportation of employees to the office/ establishments/ factories etc.
- Health insurance premium paid by the employers for their employees
Key points for consideration
Although from the above analysis, it may be said that ITC shall be available to a taxpayer in respect of the above discussed inward supplies, it is imperative to keep in mind the following points of considerations -
- Medical insurance under the said Order is mandatory only for 'workers' - On a careful reading of the entry in Annexure II of the Order, it is understood that medical insurance is mandatory only for 'workers.' The term 'workers' is not defined under the GST law or the General Clauses Act, 1897. However, the following understanding may be derived -
- The term 'worker' in Annexure II of the Order has been used in connection with 'all offices, factories and other establishments.' Hence, the term may be said to include all kinds of employees, workers etc. within its ambit;
- It is a well-established principle of law that a beneficial provision must have a liberal interpretation. Once the substantive requirements of a beneficial provision are satisfied, a liberal interpretation should be adopted and benefits to be given to all eligible persons. In the present scenario, since the substantive condition of availing health insurance in view of the pandemic is satisfied in terms of the Order under DMA, a liberal interpretation to the term 'worker' may be adopted to encompass all kinds of employees;
- The term 'workman' is defined in Section 2(s) of the Industrial Disputes Act, 1947. This term widely covers all types of employees whether skilled, unskilled, technical, operation etc. whether the terms of employment are express or implied. Hence, it may be construed that the term 'worker' used in the Order also has to be seen in a wider context.
- The term 'worker' is defined under the Factories Act, 1948 to mean any person employed directly or through any agency, in any manufacturing or cleaning process or any other incidental work, with or without remuneration. Hence, even if reference is drawn from the Factories Act, the term 'worker' would connote the labourers engaged in the manufacturing process and thus, encompass a major class of workforce.
- Whether ITC shall be available only for the premium paid during the period in which lockdown persists or for every premium paid under the policy - On a careful reading of the provision to Section 17(5)(b), it may be construed that ITC in respect of the specified goods or services shall be available only if it is obligatory for an employer to provide the same to its employees under any law for the time being in force. ITC on such services may be said to be availed presently on the basis of the MHA's Order in force. However, any change in the guidelines may be required to be closely monitored to analyse the ITC eligibility in future.
- State-wise directives - Companies will have to map state specific directives issued in order to implement the MHA order.
In view of the above analysis, the taxpayers may explore options to avail input tax credit on the expenses incurred for the purchase of soaps, sanitizers etc. in the workplace and for providing health insurance services to the employees. This may provide considerable aid to the taxpayers by optimizing the costs to a great extent.