Input Tax Credit (ITC) on Expense due to COVID -19

The Covid-19 Pandemic is unprecedented situation for the entire world. The lockdown followed to curb the spread of this virus has brought economic and financial crisis. The entire pandemic has given rise to new normal such as the use of masks, sanitizers and practicing of social distancing. It also gave rise to various new regulations issued by various government authorities at Centre, State and local level. The Companies are spending significant amount to comply with the new regulations. So, it gives rise to two significant aspects for every business:

1) Whether the expenses related to the preventive measures eligible for ITC?

A Registered person under GST can claim ITC as per these provisions.

Sec 16(1) of CGST Act states that “Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any 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 and the said amount shall be credited to the electronic credit ledger of such person”

The Hon’ble Supreme Court in the matter of Commissioner of Income Tax, Kerala v. Malayalam Plantations Limited has held that the expression for the purpose of the business may include not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery. It may include measures for the safety of the business and protection of assets and property from expropriation.

It may also comprehend payment of statutory dues imposed as a pre-condition to commence or carrying on of a business. Further, It may also bring in many other acts incidental to the carrying on of a business. It can be inferred from the above and various other rulings, that expenses incurred by a taxable person to run the business should be termed as expenditure incurred in the course of business.

To protect employees from the spread of COVID 19, the employer incurs certain expenses so that the business can run smoothly. All such expenses are used in the course or furtherance of business. The ITC can be claimed on the supply of goods or services specified in section 17(5) (b) if these specified expenses are mandated as per any law for the time being in force.

In our view, Input tax Credit on Masks, PPE Kits, Sanitizers, Sanitization services for Office/ Factory Premises, Cabs for employees, renovation of AC unit to make it Covid compliant are eligible for ITC. These transactions should comply with other procedural and documentation provisions of the act.

2) Whether the Input Tax Credit on the supply of free goods due to COVID-19 is available?

In this era of pandemic various organizations are coming forward to help the society and undertake various welfare measures. The question which arises whether such expenditure may be eligible for ITC. In this regard, it is important to note section 17(5) states that ITC cannot be availed on goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

Donation to PM CARES Fund, Donation to any NGO etc. would be part of CSR and not subject matter of ITC. Provision of Food to poor / Buses for Migrant labourers/ Shelters for Underprivileged, Sanitization of Colonies of Employees etc. would not be eligible for ITC being voluntary in nature and disallowed as per Section 17(5).

Situations, where business assets on which ITC was availed (free goods) are being donated, will be treated as supply even if without consideration and should be taken care of.

Conclusion

The Welfare measures being taken up by corporates and business houses should continue to overcome the pandemic situation. However, one should carefully analyze each situation to have full benefits within the legal framework & to avoid future litigations.

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