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ITC of RCM paid on residential property w.e.f 18.7.22, Goods and Services Tax - GST

Issue Id: - 118102
Dated: 5-8-2022
By:- Nikhil Virkar
ITC of RCM paid on residential property w.e.f 18.7.22

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Sir/ Madam, GST paid under RCM on residential flat by registered person w.e.f 18.7.22 and being in use by its employee, whether ITC is allowed to claim being a business expenditure? or will it be hit by provisions of Section 17 of CGST Act 2017

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Showing Replies 1 to 5 of 5 Records

1 Dated: 5-8-2022
By:- Ganeshan Kalyani

In my view it will be considered as a personal consumption which is blocked credit under section 17(5).


2 Dated: 5-8-2022
By:- Amit Agrawal

If such residential dwelling is used by employees for purposes like running mini-offices (such as sales office), such use cannot be 'personal consumption' and bar on ITC u/s 17 (5) (g) will not apply.

But, if such residential dwelling is used by an employee for his own home-accommodations, issue is expected to be hugely controversial, litigation-prone and taking such ITC seems risky. And one must be willing to that risk (& potential consequences thereto, if court rules in revenue's favor) before taking such ITC.

With above note of caution & disclaimer, my view is that such ITC can still be claimed and bar on ITC u/s 17 (5) (g) will not apply when such residential dwelling is used by an employees for his own home-accommodations. Some of reasoning for the same is as follows:

A. Prior to 01.02.2019, ITC was specifically disallowed as per then prevalent Section 17 (5) (b) which reads as follows:

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;"

B. The way I see this is that prior to 01.02.2019, to deny ITC against any inward supply - which is used for personal consumption by an employee' - there were TWO specific situations:

I) ITC was denied on some specified inward-supplies used by employees provided that 'the Government has NOT notified such services as obligatory for an employer to provide to its employees under any law for the time being in force'.

II) ITC was denied on travel benefits extended to employees on vacation such as leave or home travel concession, whether or NOT the Government notifies these services which are obligatory for an employer to provide to its employees under any law for the time being in force. This was blanket exclusion prior to 01.02.2019.

C. So, there are TWO specific situations specified under same sub-section 17 (5) for any inward supply where 'personal consumption by an employee is the main angle to deny ITC' and one of those situations was blanket exclusion from ITC specifically dealing with supplies related to "travel benefits extended to employees on vacation" (which is as much a personal consumption by an employee and IF NOT MORE, as the issue under consideration). Hence, Section 17 (5) (g) should not be read into as dealing with a case of "personal consumption by an employee". Said restriction is only for "personal consumption by tax-payer assessee".

C1. In other words, if Section 17 (5) (g) also covers "personal consumption by an employee" to deny ITC, there was no need to put clause (iv) (i.e. travel benefits extended to employees on vacation such as leave or home travel concession) in Section 17 (5) (b).

D. Post 01.02.2019, main changes (in the context of this discussion) in above-said Section 17 (5) (b) was that ITC against every inward supplies specified therein is allowed if it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

E. But, again, that also means that ITC against all specified inward supplies u/s 17 (5) (b) will not be available employer provides them to employees without any statutory obligation under law. And those specified inward supplies u/s 17 (5) (b) does not include 'Renting of Residential Dwelling Services' but continues to include "travel benefits extended to employees on vacation" and "Renting or hiring of Motor Vehicle".

F. Above arguments needs to be supported by demonstrating the facts to prove that such 'residential dwelling' fulfills other business-needs such as getting most-suitable employees who are not having own home in either in same city or in the vicinity of tax-payer's place of businesses where such employee is working etc. In other words, these services can be seen as 'personal consumption' from point of view of an employee but they are are not 'personal consumption' from point of view of the tax-paper assessee.

While keeping in mind the note of caution & disclaimer given at start of my post, my view is that ITC against 'Renting of residential dwelling is used by an employee for his own home-accommodation' can still be claimed and bar on ITC u/s 17 (5) (g) will not apply.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.


3 Dated: 5-8-2022
By:- Amit Agrawal

Now, kindly allow me to explain the risks in availing such ITC and why courts may rule in favor of Dept.:

Subject Section 17 (5) starts as follows:

"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:-

& then followed by clause (a) to (i)"

So, it is possible to argue that in view of non-obstinate sub-section followed by words 'input tax credit shall not be available in respect of the following', sub-clauses (a) to (i) should be read into as independent of each other. So, even if any inward supply fouls with any one of sub-clauses (a) to (i), ITC is not available u/s 17 (5).

Hence, one can argue that sub-clause (g) does not talk about 'personal consumption" by whom and subject transaction fouls with restrictions under sub-clause (g) to deny ITC.

While this risk remains and only court/s will settle them - one way or other, my personal views about this risk are as follows:

I agree with the argument that even if any inward supply fouls with any one of sub-clauses (a) to (i), ITC will not be not available due to Section 17 (5). But, due to reasons explained in my earlier post, sub-clause (g) does not cover "personal consumption from point of view of an employee" - in given situation - in my view.

In other words, as subject inward supply - under discussion here - does not fouls with any one of sub-clauses (a) to (i) of Section 17 (5), ITC cannot be denied using Section 17 (5).

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.


4 Dated: 5-8-2022
By:- Amit Agrawal

Lastly:

To see how such risks / controversy can be avoided, you may refer to my posts under Issue ID - 118044 bearing subject line 'GST on rent of employee paid by employer'.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.


5 Dated: 5-8-2022
By:- Amit Agrawal

My apologies for multiple posts here. It is just that issue is very interesting and worth looking for from all angles:

Now, coming back to my post at serial no. 3 above, if contrary stand (i.e. stand favoring revenue) is taken on face value so as to deny credit, does that mean that sub-clause (g) overrides proviso under sub-clause (b) (i.e. 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) where ITC against certain specified inward-supplies is allowed even when same is used for personal consumption by the employees?

OR, does harmonious interpretation requires to 'exclude' those ITC which is specifically allowed in sub-clause (b) while denying ITC under clause (g)? But, is this harmonious interpretation argument is contrary to original argument explained my post no. 3 to deny ITC?

Moreover, how one applies harmonious interpretation rule for position prior to 01.02.2019 where blanket exclusion from ITC was there for supplies related to "travel benefits extended to employees on vacation" even when same was obligatory on the employer (which is as much as a personal consumption by an employee and IF NOT MORE, as the issue under discussion here) under sub-clause (b) while sub-clause (g) was also present?

OR, does this mean that changes made effective from 01.02.2019 in sub-clause (b) changes interpretation of clause (g)? Is this really possible and if yes, since when (i.e. since 01.07.2017 or since 01.02.2019)?

While my ex-facie views and reasons are shared in my posts here, I understand issue is complex in nature because of two contrary views justifying themselves fully. And court can go either way.

I would request Shri Ganeshan Kalyani Ji & other professionals on this forum to deliberate all connected the issues taking into account the both sides of views. This may help in arriving at some consensus or at-least find all the weak links in every argument/s for both possible view/s.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.


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