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September 12, 2020

No GST is applicable on Transportation charges recovered from employees

by CA Shivam Jaiswal in GST, Legal Court Judgement

No GST is applicable on Transportation charges recovered from employees

Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax. According to Section 16(1) of the CGST Act, Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services 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.

Section 17(5) pertains to blocked credit under CGST Act which states the situations where input tax credit shall not be available.

Certain situations when ITC cannot be claimed:-

  • A person cannot avail ITC wherein the given motor vehicle is used to transport people and has a seating capacity of less than or equal to 12 +1 (driver)
  • A person cannot claim ITC for the tax paid for the following:-
  • Food and beverages
  • Outdoor catering
  • Beauty treatment
  • Health services
  • Cosmetic and plastic surgery
  • Services of general insurance, servicing, repair and maintenance
  • Sale of membership in a club, health, fitness centre
  • Rent-a-cab services, life insurance, health insurance
  • Travel, benefits extended to employees on vacation such as leave or home travel concession.
  • Works contract services for construction of immovable property
  • Construction of immovable property on own account
  • Composition scheme
  • Non residents
  • Supply for personal use
  • Free samples and goods destroyed
  • Restaurant services

Now, an important point mentioned above for which ITC will not be available will be when the motor vehicle is used to transport people and has a seating capacity of less than or equal to 12 +1 (driver). Let us refer to the case of Tata Motors Limited (GST AAR Maharashtra) where an appeal was filed before the Authority of Advance Ruling (AAR) on whether ITC will be available on GST charged by service provider on hiring of bus/motor vehicle having seating capacity of more than thirteen person for transportation of employees to & from workplace.

Facts of the Case and reasons of Appeal:-

  • Applicant had engaged service providers to provide transportation facility to its employees in non AC buses having seating capacity of more than 13 persons.
  • Appeal was filed to the AAR on the following grounds:-
  • Whether input tax credit (ITC) available to Applicant on GST charged by service provider on hiring of bus/motor vehicle having seating capacity of more than thirteen person for transportation of employees to & from workplace?
  • Whether GST is applicable on nominal amount recovered by Applicants from employees for usage of employee bus transportation facility in non-air conditioned bus?
  • If ITC is available as per question no. (1) Above, whether it will be restricted to the extent of cost borne by the Applicant (employer)?

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Observations of the AAR on whether applicant was entitled to avail ITC of the GST paid to the service providers

  • To answer the question AAR referred to the provisions of Chapter V of the CGST Act, 2017 comprising of Sections 16 to 21.
  • Section 16 of the CGST Act, 2017 contained provisions with respect to eligibility and conditions for taking ITC.
  • According to Section 16(1), ITC in respect of receipt of services is available and can be taken. However, the credit is available subject to such conditions and restrictions and in the manner specified in Section 49 of the CGST Act.
  • AAR had no doubt that in this case, the supply of services received by the applicant was used in the course or furtherance of their business and therefore prima facie, they were eligible to take credit of GST charged by their suppliers.
  • However, AAR found that the applicant was eligible to take ITC under the provisions of the CGST Act.
  • AAR wanted to verify whether Section 17(5) debarred the applicant from taking credit.
  • Section 17(5) debarred ITC on motor vehicles or conveyances used in transport of passengers till the date of the amendment i.e. 01.12.2019.
  • However with effect from 01.12.2019, ITC was allowed on leasing, renting or hiring of motor vehicles, for transportation of persons, having approved seating capacity of more than 13 persons (including the driver).
  • Therefore in this case, since the applicant had specifically submitted (as agreed by the jurisdictional officer), that they were using motor vehicles having approved seating capacity of more than 13 persons (including the driver), the applicant shall be eligible for ITC in this case.
  • However AAR made it clear that if the motor vehicle hired by them does not have an approved seating capacity of than 13 persons (including the driver), then in that case the applicant would not be eligible for ITC.

Observations of the AAR on whether GST was applicable on nominal amount recovered by Applicant from their employees for usage of employee bus transportation facility in non AC bus

  • Applicant had submitted that they issued pass only to their employees, so that the transportation facility could be used by such employees, for which nominal amount was recovered on monthly basis.
  • They have also submitted that once, employee stopped to be in employment with Applicant, he/she was not authorized to use the transportation facility.
  • In other words, employer-employee relationship was a must to avail this facility.
  • AAR found that the applicant was not providing transportation facility to its employees, in fact the applicant was a receiver of such services in the instant case.
  • The applicant’s contention that they were eligible for exemption from GST under SI No. 15(b) of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 in respect of nominal amounts of recoveries made from their employees towards bus transportation service, was not correct.
  • According to SI No. 15(b), Transport of passengers, with or without accompanied belongings, by non air-conditioned contract carriage other than radio taxi, for transportation of passengers, excluding tourism, conducted tour, charter or hire was exempt from GST.
  • The exemption under the said notification was available only when the supply was taxable in the first place.
  • In the subject case, the transaction between the applicant & their employees, due to “Employer-Employee” relation as stated by the applicant in their submissions, was not a supply under GST Act.
  • AAR referred to Schedule III to the CGST Act which listed activities which shall be treated neither as a supply of goods nor a supply of services.
  • As per clause 1 of the Schedule-Ill, services by an employee to the employer in the course of or in relation to his employment shall be treated neither as a supply of goods nor a supply of services.
  • Since the applicant was not supplying any services to its employees, in view of Schedule III, AAR was of the opinion that GST was not applicable on the nominal amounts recovered by Applicants from their employees in the subject case.

Observations of the AAR if ITC was available to the applicant whether it would be restricted to the extent of cost borne by the Applicant

  • The applicant, citing the decision of the High court of Bombay in the case of CCE Nagpur vs Ultratech Cements Ltd (2010) (Bom) had submitted that ITC was not admissible to Applicant on part of cost borne by employee and thus ITC would be restricted to the extent of cost borne by the Applicant.
  • The jurisdictional officer had also endorsed the view of the applicant and AAR found no reason to deviate from the view expressed by both, the applicant as well as the jurisdictional officer

In conclusion,

Input tax credit (ITC) was available to Applicant on GST charged by service provider on hiring of bus/motor vehicle having seating capacity of more than 13 persons for transportation of employees to & from workplace but only after 01.02.2019. The ITC will be restricted to the extent of cost borne by the Applicant (employer)

GST is not applicable on nominal amount recovered by Applicants from employees for usage of employee bus transportation facility in non-air conditioned bus.

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