Blocked Input Tax Credit

Subsection 5 of Section 17 of the GST Act gives the list of items on which GST is not eligible

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection
(1) of section 18, input tax credit shall not be available in respect of the following,
namely:—
(a) motor vehicles and other conveyances except when they are used––
(i) for making the following taxable supplies, namely:—
(A) further supply of such vehicles or conveyances ; or
(B) transportation of passengers; or
(C) imparting training on driving, flying, navigating such vehicles
or conveyances;
(ii) for transportation of goods;

(b) the following supply of goods or services or both—
(i) food and beverages, outdoor catering, beauty treatment, health services,
cosmetic and plastic surgery except where an inward supply of goods or services
or both of a particular category is used by a registered person for making an
outward taxable supply of the same category of goods or services or both or as
an element of a taxable composite or mixed supply;
(ii) membership of a club, health and fitness centre;
(iii) rent-a-cab, life insurance and health insurance except where––
(A) the Government notifies the services which are obligatory for an
employer to provide to its employees under any law for the time being in
force; or
(B) such inward supply of goods or services or both of a particular
category is used by a registered person for making an outward taxable
supply of the same category of goods or services or both or as part of a
taxable composite or mixed supply; and
(iv) travel benefits extended to employees on vacation such as leave or
home travel concession;
(c) works contract services when supplied for construction of an immovable
property (other than plant and machinery) except where it is an input service for further
supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an
immovable property (other than plant or machinery) on his own account including
when such goods or services or both are used in the course or furtherance of business.
Explanation.––For the purposes of clauses (c) and (d), the expression
“construction” includes re-construction, renovation, additions or alterations or repairs,
to the extent of capitalisation, to the said immovable property;
(e) goods or services or both on which tax has been paid under section 10;
(f) goods or services or both received by a non-resident taxable person except
on goods imported by him;
(g) goods or services or both used for personal consumption;
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free
samples; and
(i) any tax paid in accordance with the provisions of sections 74, 129 and 130.

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Demystifying Employee Gifts under GST

The rollout of Goods and Service is being dubbed to be the mother of all indirect tax reforms in the country but in reality, it is a business process reform. It changes the way we do business in India after the rollout of GST. There is no room for the words purchase or sale of goods in the GST Laws, it replaces these words with Supply. The word supply includes all activities which are undertaken for consideration or in lieu of consideration i.e barter. This nails down all the disputes which are there in the current taxation.

Similar to this we also have another concept called the taxation of employee benefits, though employee benefits are taxed under the current taxation under Income Tax Act 1961, it is being proposed to tax the same under Goods and Service Tax also in India. The taxation of employee benefits has been taken from Malaysia, where GST is implemented from 1st of April 2015.

To understand the tax implication of employee benefits let’s see the definition of Supply and Related Parties.

Supply is defined clearly in section 3 and Schedule I &  II states what activities are to be treated as supply as per the Central Goods and Service Tax Bill introduced in the Parliament

Section – 3

  1. all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
  2. import of services for a consideration whether or not in the course or furtherance of business;
  3. the activities specified in Schedule I, made or agreed to be made without a consideration; and
  4. the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

Schedule I

  1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
  2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:

Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.

  1. Supply of goods—
    1. by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
    2. by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.
  2. Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business.

In paragraph 2 we find the wordings “Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as the supply of goods or services or both”.

The basis of the above, here we do not have any consideration received but still, GST has to be paid.

Gifts are not normally given to employees for their exceptional performance or during the festivals and these are not part of the offer letter or the appointment letter. Now under GST, ll such gifts either in kind or in cash or in form of services provided by the company will be taxed and it means that the company has to pay GST on such transactions.  When gifts are issued there is no consideration received from the employee, as discussed it is token of appreciation or for their loyalty.

Now companies or establishments have to pay GST similar to the reimbursement costs collected from the employees like issue of duplicate ID card etc.,

Though the schedule talks about the threshold limit of Rs 50,000 one thing which is not clear is “is GST applicable one the gifts from the one rupee or only on the amount which crosses Rs 50,000. As of now, the law is not clear on this point, we need to wait for the final rules and law.

Another question is how to pay the GST, does the company has to issue a tax invoice? If yes will the buyer and seller will be the same? Under which section of the GSTR – 1 return this tax invoice has to be shown? Clarity is also required in this context also.

Value of gifts issues in a financial year means total values of gifts issued during the financial year from time to time, this means that there should be a provision in the accounting or any other software the taxpayer is using to keep track of the same in the system by employee and that should be able to generate a tax invoice once it crosses Rs 50,000 for an employee.

The next question, can the registered taxable person claim input tax on the gifts procured to be distributed to the employees?  Input tax credit is eligible only if used for the furtherance of business or used for the outward supply of goods or services, this is clear from the section 16 and 17 of the CGST Act.  Say for example A Ltd wants to give  Diwali gift to all its employees Halidram sweet boxes costing Rs 3000 each. A Ltd incurs Rs 1,75,000 for bringing the sweet boxes to it is office as transportation costs, is GST paid on the inward transport cost is eligible to be taken as input tax credit?

Section 16 as input tax credit is eligible only if it used for the furtherance of business but in the case of gifts, it will directly impact the furtherance of business. Say if A Ltd does not give Diwali gifts to its employees their morale will come down and resulting in it lower performance and thereby impacting the furtherance of business. The basis of this logic can A Ltd take input tax credit on GST paid on the transportation charges?

Clarity is required in this context also else it can lead to disputes between the trade and industry.

It is normal practice to provide tea or coffee or any other beverage to the employees, though it is not part of the appointment or offer letter, does the cost of coffee or tea cost should be included gifts value? This is not recommended by the government so technically it has to treated as a gift if we go by the clause A of subsection 5 of Section 17 of the CGST Act.

  • the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or

Or we have to wait for the list to be notified by the government, if yes then it should spell out that providing of coffee or tea is not to be treated as gift.

In the meantime, the companies have to relook their practice of giving gifts to employees and also have proper systems in place to pay taxes if any such a need arises. For this, the systems being implemented in place should track the gifts by the employee. The offer letter/appointment letters issued should be revisited and if required the clauses need to be modified in line with the GST requirements. The early they do this activity the better for the organizations.

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the author may or may not be associated with in professional or personal capacity unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

These examples are based on the information available in the public domain and authors interpretation of the law and may change based on the actual law passed.