In the last meeting, the GST Council promised to issue clarifications relating to various Input Tax Credit (ITC) issues under GST. Keeping its promise, the CBIC has issued a circular clarifying various ITC-related issues in respect of perquisites provided by employers to its employees and leasing of assets.
The GST law was amended on 1 February 2019 to allow ITC on goods & services which were mandatorily provided under any law by an employer to its employees. Typically, an employer provides various services to an employee such as canteen service, medical insurance, transportation service, concessional travel, etc. These services are provided either free of charge or at a nominal price. Also, most of these services are provided as a mandatory obligation by an employer. The Appellant Authority for Advance Ruling in the case of Musashi Auto Parts Pvt. Ltd. held that amendment will only have limited applicability and ITC on travel benefits extended to an employee shall only be allowed.
Basis this ruling, ITC on canteen service was disallowed even when it was provided as a mandatory obligation by an employer. The analogy of this ruling would also result in the denial of ITC on medical insurance, transportation service, etc. This was never the intent of the legislation. CBIC has now clarified that the amendment has wider applicability and ITC is available on canteen service, medical insurance, transportation service, and other services where the same is mandatorily provided under any law. This is a welcome clarification and will reduce tax costs of the industry as well as employees (where GST was separately recovered from employees).
Perquisites provided by an employer to its employees always attract the attention of the tax authorities. Service provided by an employee to an employer is exempted from GST. The legislature never intended to cover tax benefits given to an employee like free food, transportation, medical insurance, etc. when the same was given as part of contractual obligation. An employee is covered under the definition of ‘related person’ under GST. The law levies GST on ‘fair market value’ when there is a supply between related persons even if no consideration is charged. There is an industry-wide dispute about whether GST applies to free supply from an employer to an employee being a related party. To aggravate the issue, the Authority for Advance Ruling in the case of MFAR Hotel & Resorts Pvt. Ltd. held that the supply of free food to an employee is a supply of service attracting GST as consideration is not necessarily due to related party transaction. Thus, there was confusion in law due to overlapping provisions relating to supplies made to employees.
The recent circular now clarifies that any perquisite provided by an employer to its employees under a contractual agreement is in lieu of employment and would not attract GST. Thus, any benefit provided to an employee as part of HR policy, or customary practice under an employment contract would be outside the GST ambit when no consideration is charged. This shall cover the supply of free food, transportation, medical insurance, etc. This clarification will put rest to the dispute about the GST levy on any free supply of goods & services by an employer to an employee. This will also reduce tax costs on the industry as well on employees (where GST was separately recovered)
Further, the circular clarifies that ITC on leasing of all assets (other than leasing of motor vehicles, aircraft, and vessels) is allowed under GST.
A circular is clarificatory in nature. It only re-iterates which was always there in law. Thus, the clarifications provided by the present circular would be applicable from the inception of GST i.e., 1 July 2017. The industry is facing GST inquiries on the above transactions. This Circular will help in providing certainty to the industry as well as the department to arrive at a correct position of law.
Overall, the circular provides relief to the industry at large and would help in reducing litigation.
(Saurabh Agarwal, Tax Partner, EY India. With inputs from Gaurav Narula, Tax Director, EY India)
