Eligibility of ITC on Medical Insurance

[Shivashish Karnani]

In this article, eligibility of Input Tax Credit of Medical Insurance Expenses in the hands of employers incurred for employees on account of the obligatory direction issued by Ministry of Home Affairs in exercise of Disaster Management Act is dealt. Author is of the considered view that input tax credit is available for entire amount of GST charged (irrespective insurance expense is for a year or half year) albeit obligatory direction of medical insurance was applicable only for period from 15^th April to 3^rd May 2020 i.e. 19 days.

Relevant Legal Provisions:

GST Law:

As per Section 16(2) of CGST Act, Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––

(b) he has received the goods or services or both.

As per Section 17(5) of CGST Act, input tax credit shall not be available in respect of the following, namely:-

(b) the following supply of goods or services or both-

(i) ….. life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both 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) …

(iii) …

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.”

Disaster Management Law:

Central government has included the Covid-19 outbreak as “Notified Disaster” as a “critical medical condition or pandemic situation”. As per Section 10(2) of the Disaster Management Act, 2005 (“DMA”), National Executive Committee (constituted by Central Government) may-

(l) lay down guidelines for, or give directions to, the concerned Ministries or Departments of the Government of India, the State Governments and the State Authorities regarding measures to be taken by them in response to any threatening disaster situation or disaster.

In exercise of the powers conferred by above provision, various directions were issued to prevent the spread of COVID-19 vide Ministry of Home Affairs order no. 40-3/2020-DM-I(A) dated 15th April, 2020 which remained in force till 3^rd May, 2020.

Clause 21 and 22 of the above directions states as follows:

21. Instructions for enforcement of above lockdown measures:

“(ii) All industrial and commercial establishments, work places, offices etc. shall put in place arrangements for implementation of SOP as in Annexure II before starting their function.”

22. Penal Provisions:

“Any person violating these lockdown measures shall be liable to be proceeded against as per the provisions of Section 51 to 60 of the DMA besides legal action under Section 188 of the IPC, and other legal provisions as applicable…”

Annexure II states that:

The following measures shall be implemented by all offices, factories and other establishments:

“5. Medical insurance for the workers to be mandatory.”

Insurance Law:

Section 2(6C) of Insurance Act states that, ““health insurance business” means the effecting of contracts which provide for sickness benefits or medical, surgical or hospital expense benefits, whether in-patient or out-patient travel cover and personal accident cover”.

Circular issued by Insurance Regulatory and Development Authority (IRDAI):

IRDAI in pursuant to the aforesaid MHA order has issued a circular which interalia provided as under:

“2. In light of the above, all General and Health Insurance companies may offer comprehensive health insurance policies either to individuals or groups in order to enable the listed organisations / employers / establishments comply with the above referred directions”.

Analysis:

1. As per the Section 17(5), input tax credit of health insurance is available if it is mandatorily required to be provided to employees under any law for the time being in force.

2. The above directions/guidelines were effective from 15^th of April to 3^rd of May i.e. for the period of 19 days. These directions are mandatorily required to be followed during this period, otherwise penal consequences are provided in DMA and Indian Penal Code against the any person including companies/firms, etc.

3. Following issue specific observations are noted and discussed:
   1. Even though the aforesaid direction read with annexure II states of medical insurance of workers, however going with the purpose which it seeks to achieve and also since it needs to be implemented by offices and other establishments as well (apart from factories), the same should cover employees other than workers as well. Even it can cover contractual employees.
   2. While GST law states of Health Insurance but the directions state of Medical Insurance. As per the relevant provisions re-produced above from Insurance Act, health insurance includes contracts that provide for medical benefits. Health insurance is a wider time since it incorporates hospitalisation, pre and post hospitalisation expenses. Even further, IRDAI circular specially states the insurance companies would be offering Health Insurance either at individual level or group of individuals’ level to comply with the directions referred in MHA order. Thus, employers’ would be taking health insurance which is a wider term and covers medical insurance well.
   3. Health (Medical) Insurance is generally taken for a period of 1 year and even the insurance company does not offer insurance for a period of 19 no. of days. Question for consideration is, whether ITC on health insurance would be available for complete 1 year or would be available only for 19 days. In this regard, it is relevant to refer to the ratio by Hon’ble High Court of Gujarat in the case of THE PRINCIPAL COMMISSIONER VERSUS M/S ALEMBIC LTD. [2019 (7) TMI 908 - GUJARAT HIGH COURT] In this case, question before the High Court was whether reversal would be required on inputs/input services, ITC which was availed earlier. However, later the constructed units were sold after the completion certificate and thus were exempt services. It was observed that:

“While the law does not intend to allow any undue benefit to a service provider in terms of Cenvat credit of service tax paid on input services used in providing non-taxable output activity, however, once it is legally and validly availed, the same cannot be denied and/or recovered unless specific provisions exist for the same and credit entitlement is on the date of receipt of inputs when the output activity was wholly dutiable and merely because the finished goods eventually became exempt later on, the credit availed on inputs which were contained in semi finished/ finished goods state was held as not deniable”. (Para 15)

“The Tribunal therefore, on a harmonious reading of Rule 3 of the Rules read with Rules 6 and 11(4) of the Rules held that eligibility/entitlement to credit has to be examined only at the time of receipt of input service and once it is found to be availed at a time when output service is wholly taxable, and the said credit is availed legitimately, the same cannot be denied and/or recovered unless specific machinery provisions are made in this regard”. (Para 16)

It is relevant to note that CESTAT in the instant case (against which department filed appeal before High Court) placed reliance on the decision of Hon’ble Supreme Court in the case of Collector v. Dai Ichi Karkaria Limited, 1999 (8) TMI 920 - SUPREME COURT wherein it was held that “Modvat / Cenvat Credit is a vested right. Once it is legally and validly availed, the same cannot be denied and/or recovered unless specific provisions exist for the same”.

Though the decision pertains to erstwhile Service Tax law but the same still hold the field as the provisions under GST law are para materia. As per Section 16(2), one of the condition for claim of ITC is services should be received. In the present case, as and when policy document/invoice is issued in the name of employer for a period of 1 year, it is understood that the services are received on the effective date of insurance policy for the purpose of claim of ITC. Eligibility of the services are to be determined on the date of receipt of services (in the present case, effective date of insurance policy). Even further, once eligibility test is passed, there is no machinery provision under GST law which states that the eligibility needs to be revisited each month/tax period even in case of those services, tenure of which spread for a period more than a month. Therefore, in our view, credit is available for entire period (whole 1 year in this case) provided insurance policy should have been taken and effective from 15^th April, to 3^rd May, 2020.

4. Post 3^rd May, revised directions/guidelines were issued which didn’t included the aforesaid obligatory requirement of medical insurance. Therefore, insurance services taken post this period is ineligible.

Conclusion:

ITC of the health insurance amount as reflected in insurance policy document/invoice is available provided insurance should have been taken and effective on any date from 15^th April to 3^rd May, 2020.

PS: It is relevant to note that there can be cases where proportionate insurance expenses either wholly or in part may have been recovered from employee. GST implications arising thereto are not considered in the analysis above.

Views expressed are strictly personal. Please take legal/professional advice before relying on the above.

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