Issues of GST ITC in Lockdown of Business

Arjun (Fictional Character): Krishna, majority of businesses are agonizing the consequences of lockdown. The businessmen have to combat various problems arising, including the issues of ITC to be taken or not for transactions incurred during the lockdown period. Please guide on this concern.

Krishna (Fictional Character): Arjuna, the government is trying to curtail the difficulties faced by businesses due to lockdown. Although some issues are still to be addressed by the government regarding eligibility of GST ITC of transactions made during the lockdown situation. Let’s discuss those in detail.

Arjun (Fictional Character): Krishna, for the businesses that are running in lockdown, is ITC eligible on expenses made for employee’s health safety?

Krishna (Fictional Character): Arjuna, the government has allowed with restrictions for different types of goods and services business to run in lockdown, that too with some mandatory guidelines. These guidelines ensure social distancing, proper sanitization of the workplace as well as of employees, thermal screening at entrances, compulsory usage of masks while at work, etc. Following are a few examples of expenses and there ITC impact:

1. ITC shall be eligible on all such expenses like Sanitizers, Masks, Gloves, Medical kits, etc incurred and medical equipment’s like thermal Scanners, Hand washers, etc purchased by the business, as these expenses are mandated under the Covid-19 guidelines to run the business.
2. In case of group insurance policy of employees, if the benefit of premium paid and maturity occurs to the company, and it is as per the covid-19 guidelines, then ITC on premium paid for such group medical insurance of employees is allowed to be taken credit of. However, ITC on personal life insurance is blocked u/s 17(5) of the CGST Act.
3. For companies, CSR expenditure is obligatory as per the Companies Act, 2013. If any company makes CSR expenditure in the lockdown period, for donation of food, masks, sanitisers, other essential goods and services others or to its employees, ITC on such expenditure may be eligible. But as per AAR of Ploycab wires Pvt Ltd of Kerela, ITC on CSR was denied. Companies can also draw analogy from section 17(5)(b) wherein input tax credit has been allowed by CGST Amendment act, 2018 on expenses., where it is obligatory for an employer to provide the same to its employees under any law for the time being in force. However ITC is not available on free supply of goods or services.

Arjun (Fictional Character): Krishna, the lockdown has promoted the Work from home Culture. Is ITC eligible for such expenses?

Krishna (Fictional Character): Arjuna, work from home requires the use of Computer devices, high speed internet, updated or new software, IT infrastructure and many more things. Here is the classification of eligibility for work from home expenses for ITC:

1. If expenses incurred for Work from home such as Computers, Laptops, internet services, etc. are incurred by the business and the invoice raised are in the name of business itself, then the business can claim ITC for such expenses. Even if, they may have been delivered at employee home directly or not.
2. If expenses incurred for Work from home are incurred by the employee, and reimbursement for the expenses incurred by the employee is made, in such case ITC shall not be eligible.

Arjun (Fictional Character): Krishna, what are the other provisions of GST which needs keen attention of taxpayers for claiming ITC?

Krishna (Fictional Character): Arjuna, apart from the provisions discussed above, there are few major points which needs to be attended by the taxpayers in period of lockdown:

1. ITC on goods and services shall be reversed, for which inward supply has been made and payment has not been made within 180 days the supplier.
2. As per rule 36(4) of the CGST rules, a taxpayer filing GSTR-3B can claim provisional ITC only to the extent of 10% of the eligible credit available in GSTR-2A. The taxpayer shall now apply the condition cumulatively for the months of February 2020 to August 2020, in the month of September 2020. 
3. ITC on goods Lost/Stolen/Destroyed due to Lockdown:
   • If the goods lost, stolen, or destroyed are inputs, i.e. raw material, and consumables, then ITC on such inputs needs to be reversed. In such case, for insurance claim of goods lost, stolen or destroyed, gross value of goods shall be considered i.e inclusive of ITC of GST.
   • For goods are destroyed, damaged, or lost when in storage, if such goods are finished goods, then no need to reverse ITC.
   • For goods those are destroyed, damaged or lost in transit, whether it be finished goods or raw material, as the goods are not physically received by the recipient even if the ownership, risks & rewards have been transferred, the recipient cannot take ITC on such goods.
4. Where, there is temporarily stoppage of business, trading, production of manufacturing industries, then ITC can be claimed for expenses incurred in lockdown. If due to lockdown, production of manufacturing industries has been totally ceased and business is discontinued, then ITC shall reverse if it is unutilised.

Arjun (Fictional Character): Krishna, what should the taxpayer learn from this?

Krishna (Fictional Character): Arjuna, the lockdown has started showing its unfavourable effects on the economy. Despite of many initiatives taken by the government, there are still some issues unsolved. Few of such issue are disallowed ITC on food and beverages and CSR activity related ITC which is obligatory as per law and are for business. Government should come out with favourable clarification on such matters soon.