Recovery of “Parents Health Insurance” premium doesn’t amount to ‘supply of service’ under GST

The taxable event in GST is supply of goods or services or both. Various taxable events like manufacture, sale, rendering of service, purchase, entry into a territory of state etc. have been done away with in favour of just one event i.e., supply. As per Section 15(5)(a)(iii) of the CGST Act, 2017, employee and employer are treated as “related persons” and hence, valuation of the supply needs to be determined as per Rule 28 of the CGST Rules, 2017

As per Rule 28 of the CGST, Rules, 2017 ‘the value of the supply of goods or services or both between distinct persons as specified in sub-Section () and (5) of Section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall:

be the open market value of such supply;
if the open market value is not available, be the value of supply of goods or services of like kind and quality;
if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 37, in that order

Where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person

Where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.

Let us refer to the case of Posco India Pune Processing Center Private Limited (GST AAR Maharastra), where the issue raised before the Authority of Advance Ruling (AAR) was whether recovery of Parents Health Insurance expenses from employee in respect of the insurance provided by the Applicant amounts to “supply of service” under GST or not.

Facts of the Case:

It was the practice of the Applicant to provide Mediclaim cover to the employees as well as to their parents.
In case of Parent Insurance facility, the Applicant initially paid the entire premium along with taxes and then 50% of the premium is recovered from the respective employees on a monthly basis.
The Applicant wanted to know whether GST was payable on recovery of 50% of the insurance premium from the salary of the employees.

Questions raised before AAR:

Whether recovery of Parents Health Insurance expenses from employee in respect of the insurance provided by the Applicant amounted to “supply of service” under Section 7 of CGST Act, 2017?
If the said recovery amounted to “supply”, what would be the time of supply and value of the said supply?
Whether the Applicant could claim input tax credit of GST charged by the insurance company?

Contention of the Applicant

As per company policy, the Applicant recovered 50% of the insurance premium amount from its employees.
As per Schedule-Ill of the CGST Act, 2017, services by an employee to employer in the course of or in relation to his employment were not treated as a supply of service.
However, if employer provided any services, the same would be considered as supply of service by employer.
Since the Applicant recovers certain amount from its employees against the insurance premium, doubt is raised whether the same will result in supply of service under Section 7 of the CGST Act, 2017 and GST will be required to be paid on the same.
Further, since the Applicant was recovering the insurance premium amount from its employees on the monthly basis, the Applicant was of the view that GST, if payable, should be paid on the same amount monthly in terms of Section 13(2)(a) of the CGST Act, 2017.
Since the Applicant was of the view that GST will be payable on the said recovery, the value on which GST is to be paid had to be determined in terms of Section 15 of the CGST Act, read with CGST Rules 2017.
Based on Rule 28, the Applicant was of the view that GST should be levied on the entire amount of premium paid by the Applicant and not just on the premium amount recovered from its employees.
Further, as per Section 17(5)(b)(iii) of the CGST Act, 2017, ITC is allowed in respect of health insurance only when 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.
Since, the Applicant could be liable to pay GST on the recovery from its employees, the Applicant was of the view that the insurance premium is paid by the Applicant to the insurance company to provide output insurance service to its employees.
Accordingly, the Applicant should be entitled to 100% input tax credit on the insurance premium paid to the insurance company in terms of Section 17(5)(b)(iii) of the CGST Act, 2017.

Observations of the AAR

AAR found that the applicant was paying the premium towards Mediclaim taken for their employees and the parents of such employees.
Against such payments made they were recovering 50% from their employees.
There was no way that the 50% amount recovered could be treated as amounts received for services rendered, since this entire amount was paid to the insurance company which was providing Mediclaim facilities to the employees and their parents.
Such recovery of 50% premium amounts by the applicant from their employees could not be supply of services under the GST laws.
Since the applicant was recovering 50% of the premium paid on Mediclaim from their employees, they wanted to treat the same as rendering of insurance output service to their employees and therefore they are contending that they are entitled to 100% input tax credit on the insurance premium paid to the insurance company in terms of Section 17(5) (b)(iii) of the CGST Act, 2017.
They had already submitted that they were primarily engaged in distribution of steel coils and also performed low value-added processing function in respect of some of the traded goods based on customer’s requirements.

The applicant had brought nothing on records to show that they were an Insurance Company and registered with such authorities.
Hence it appeared that the applicant was creating this fiction of providing health insurance to their employees only to avail 100% ITC of payments made to the insurance companies.
Hence, AAR found that they were not rendering any services of health insurance to their employees and hence there was no supply of services in the instant case.
Since there was no supply, AAR did not find the need to answer the second part of the question. In view of the same, AAR found that the Applicant could not claim input tax credit of GST charged by the insurance company.

In simple words, the recovery of Parents Health Insurance expenses from employee does not amount to “supply of service” under the GST Laws. Since there is no supply of services there is no question of time and value of the supply. The applicant cannot claim ITC of GST charged by the insurance company.

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