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Activities undertaken during COVID - Need for proper evaluation from Tax prospective

The disruption caused due to worldwide pandemic made drastic changes not only in the lifestyle of people but also work style of companies globally in each and every sector.

The disruption caused due to worldwide pandemic made drastic changes not only in the lifestyle of people but also workstyle of companies globally in each and every sector. India is in lockdown since 24th March 2020 and while the new virtual style of working has been adapted, there are certain activities/ transaction within the organisation which need to be crucially evaluated and its treatment from tax point of view.
In this article, attempt has been made to identify few such activities which a company need to critically analyse and get clarity on same from tax prospective in order to avoid future litigation.
1. Identifying the nature of activity before claiming Healthcare exemption under GST
Heathcare service is exempt from GST vide Notification No. 12/2017- Central Tax (Rate) dated 28.06.2017. While healthcare services provided in any recognised system of medicines in India by authorised medical practitioner or by a Clinical establishment such as hospitals/ nursing homes/ clinic/ sanatorium, etc. have been mentioned in the exemption notification 12/2017.
However, it has been observed that recently varied nature of services are provided during COVID-19 pandemic which can easily be confused with provision of health care service. Services such as:

  • Various centres advising or consulting over phone – Establishments such as BPO/ other centres have started consulting over phone about the healthcare of the individuals considering the current situation created due to COVID-19. Such establishments must evaluate the statutory definition of “clinical establishment” before claiming any exemption. 
  • Providing activities not falling under the definition of Healthcare  – Not every healthcare service is exempt under GST. It is seen that entities/ individuals might also prescribe regular exercises or yoga which are related to health of the individuals however which may not be related to any diagnosis or treatment or care for illness, injury, deformity, abnormality, etc. Therefore, it is imperative to evaluate the nature of service provided and whether it falls in the statutory definition of “Healthcare” as per GST law for claiming the exemption.
  • Online Apps (applications) – Though various online applications such as Practo, etc. are operating for quite long now and the law is also settled on applicability of GST on commission received by such application operators from doctors/ medical practitioners. However, with the current situation, more of new applications are being launched catering the healthcare related services of the individual. Such operators need to analyse GST applicability on their sales/ commission to claim any exemption related to healthcare service.
2. Treatment of Expenditure incurred related to COVID-19 – Whether Employee related OR Business Expense
With the recent notification of Government of India wherein companies in various states can operate with 33% workforce, Ministry of Health affairs and also respective states have issued detailed guidelines ensuring that appropriate measures are in place to protect these workforces from the health and safety risks posed by the COVID-19 virus. Apart from sanitizing of premises and social distancing, companies might also incur expense relating to masks, gloves, sanitizers for individual employees. These expenses were not of regular nature for various sectors of industry such as IT industry, Legal industry, Banking & Insurance, Financial sector, etc.
The immediate question these sectors should evaluate is the treatment of such expense i.e. “Whether it is business expense or Employee related expense”. The taxability if an expense is business expense is different from employee related expense under income tax law in India. In case of employee related expense being in personal nature, the deduction of same is disallowed to company for income tax purpose or it may be considered as taxable allowance of the employee. At the same time, GST implication of same may arise on company if considered in the nature of gift to employees and total amount exceeds INR 50,000/- in totality to all employees.
Thus, the companies must evaluate the nature of expenses incurred for the purpose of ensuring COVID-19 guidelines and it is suggested to book the expense in proper head and amend the company’s policies at the inception only to avoid any future litigation.
3. GST applicability on penal charges arising due to non-compliance of sales/ service agreement/ contract due to lockdown
It is not a hidden fact that most of the companies/ organisations were not able provide goods/ services due to lockdown situation in the country which resulted in non-compliance of their contact/ agreement. As a result they might be subject to compensation/ penalty for non-provision of service/ goods by stipulated period.
In such situation, said compensation/ penalty amount being charged as per the contract will also attract GST provisions. As per GST law, tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to any other entity would be considered as a supply of services and liable to GST @ 18% on the amount of liquidated damages.
Thus, the companies must evaluate the nature of charges and applicability of GST provisions on same.
4. Other activities
Apart from above, few other activities are also mentioned which need to be analysed from tax point of view:-
4.1  Fixed reimbursements to employees:- Various companies might be reimbursing fixed expense to its employees monthly as a part of their salary structure such as travelling expense etc. However, during lockdown, such expense i.e. travelling expense might create a problem and disallowed under income tax law. Therefore, the company may need to reconsider the proper head and treatment of same from tax point of view.
4.2  Mismatch in booking expense:- There may be cases where the company has booked expense in March 2020 while the vendor has booked the sale post lockdown lets say in June 2020. In such case due to mismatch of booking of expense first and sales later on, the input tax credit under GST might also become ineligible. However, it is expected that the Government to cater these practical issues and provide resolution.
The Companies should not treat the expenses pertaining to COVID-19 or activities done during lockdown as a regular nature activity. Due diligence, detailed clarification and expertise opinion if required must be considered for proper evaluation and analysis of that activity/ expense to avoid future litigation cost and time.

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