GST Council Meeting on October 7: Law Committee Proposes ITC Relief Under Section 17(5) of the CGST Act

The GST Council is expected to take up a proposal at its October 7 meeting to unblock Input Tax Credit on employee insurance policies, outdoor catering, free samples, and goods destroyed or written off. The proposal also leaves the question of ITC on motor vehicles, including their leasing, renting or hiring, to the Council’s discretion. A senior official told businessline that the Law Committee of the GST Council has recommended five amendments to Section 17(5) of the CGST Act to help businesses.

Background on Section 17(5)

Section 17(5) of the CGST Act lists goods and services on which ITC is blocked even when they are used in the course of business. The restrictions broadly fall into two groups. The first covers certain inputs that are prone to personal consumption but may be used for non-business purposes. The second covers situations where the onward supply is either exempt or outside the scope of GST. Representations have been received to unblock ITC across eight categories, and the Law Committee has examined these and arrived at its recommendations.

One key change is the omission of life and health insurance and outdoor catering from the section that blocks ITC.

Employee insurance policies

The official explained that denial of credit on these items creates an inconsistency, because life and health insurance have been removed from the tax net. This leaves primarily group insurance as taxable. Group insurance policies provided by companies to their employees can be considered a business expense on a prima facie basis, and this is the basis for the case for unblocking ITC. In effect, the argument is that when the taxable component is a cost of running the business, the credit chain should not break at that point.

Outdoor catering

The Law Committee’s position is that outdoor catering services could constitute a genuine business expense, incurred for business events, conferences and staff functions that are integral to business operations. Under the current law, ITC is already available where it is obligatory for an employer to provide the service to its employees under any law. Canteen services are presently a baseline infrastructure that is becoming a standard operational necessity, especially for large enterprises.

A safeguard has been retained. No ITC is permissible if outward catering is used for personal or non-business purposes. Considering these nuances, the Law Committee favours unblocking ITC for outdoor catering.

Free samples

On free samples, the official said it is part of normal business operations in sectors such as pharmaceuticals and FMCG to distribute free samples for market development and customer acquisition. Denial of ITC will add to the cost of business. The Law Committee therefore recommended that blocking ITC on such supplies may be done away with.

Goods destroyed or written off

Similarly, ITC may not be denied where goods are destroyed or written off due to expiry of their shelf life, as required under law. The reasoning here is that a legal requirement to destroy expired goods is not a voluntary loss, and the credit on the inputs that went into those goods should not be reversed.

Motor vehicles: no consensus

The official added that there was no consensus in the Law Committee on allowing ITC on motor vehicles and on leasing, renting or hiring of motor vehicles. There was also a suggestion to provide relief for vehicles alone. The matter was left for the Council to decide. This is the one item on the agenda where the outcome is genuinely open.

What this means for taxpayers

If the Council accepts these recommendations, the immediate benefit would be a lower cost of compliance and a lower effective tax cost for businesses that currently reverse or never claim credit on these items. Pharma and FMCG companies running sampling programmes, enterprises with large group insurance and catering spends, and businesses that write off expired stock stand to gain the most.

Until the Council decides and the changes are notified, the existing blocked-credit position under Section 17(5) continues to apply. Finance and tax teams should identify the ITC currently being reversed or not availed under these heads, quantify the potential impact, and be ready to act once notifications are issued. The treatment of motor vehicles and their leasing, renting or hiring will need separate attention, since that remains undecided.

All outcomes remain subject to Council approval and subsequent legislative or notification changes.

Source: businessline

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