ITC on health Insurance expenses

As we know that the input tax credit of tax paid in respect of the inward supplies of goods or services used or intend to be used in course of business of making taxable supplies can be availed by the registered person. The ITC is eligible except on the specified list of blocked credit given under section 17(5). ITC on health insurance expenses of employees is an area which requires some clarifications. In this article we are going to discuss whether ITC in respect of the expenses incurred by the company on health insurance of employees.

Under Section 17(5) of CGST Act 2017 the input tax credit is blocked in respect of the various types of insurances. The relevant clauses of section 17(5) are as follows;

“(ab) services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa):

Provided that the input tax credit in respect of such services shall be available-

(i) where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein;

(ii) where received by a taxable person engaged-

(I) in the manufacture of such motor vehicles, vessels or aircraft; or

(II) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;

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

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, 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) membership of a club, health and fitness centre; and

(iii) travel benefits extended to employees on vacation such as leave or home travel concession:

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”.

Thus from the above provisions it is clear that ITC shall be available where 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

ITC shall also 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.

However, it is to be noted that such obligatory requirement should be under any law for the time being in force. If health insurance services are provided to employees as a part of service contract between employer and employee than ITC would not be available on such health insurance services or medical facilities provided to employee since the same are not under the obligation by law.

In respect of the same matter the Tamilnadu Authority for Advance Ruling in case Faiveley Transport Rail Technologies India Private Limited [2023(12)LCX0366(AAR)] held that as per Section 17(5)(b) of the CGST Act, 2017, the supply of goods or services or both in relation to health services cannot be availed as ITC, unless it is obligatory for an employer to provide the same its employees under any law for the time being in force. We notice that providing medical facility is part of service contract, Moreover, even in the event of considering the same as an obligation or responsibility on the part of the employer, the same should be mandated under any law for the time being in force. Hence ITC would not be available on the expenses incurred for the well-being of employees such as vaccination and others health benefits extended to them.

On the same matter there are various judgements under service tax regime in which cenvat credit was allowed on the group health insurance of employees due to the obligatory requirements under any law and it was held that such credit on such insurance can be availed when obligation of employer under law. In the Group Insurance of all Employees against sickness or accident, the same has been held as eligible for Cenvat by the judgment of Hon'ble Karnataka High Court in the case of Stanzen Toyotetsu India (P) Ltd. [2011(04)LCX0151]. Insurance/Health policy - Assessee, under Workmen's Compensation Act to obtain insurance policy covering risk of employees. Employees' State Insurance Act casts obligation on employer to provide insurance services. Under these circumstances, this Group Insurance Health Policy though is also a welfare measure is an obligation which is cast under the Statute that the employer has to obey. Section 38 of the Employees' State Insurance Act, 1948, mandates that subject to the provisions of the Act, all employees in factories or establishments to which this Act applies shall be insured in the manner provided by this Act. Group Insurance Health Policy, though welfare measure, an obligation cast under Statute for employer to obey. Hence eligible for Cenvat Credit.

On similar grounds the credit was allowed in case of Commissioner of Central Excise & Service tax, LTU, Bangalore v/s Microlabs [2011(06)LCX0016] wherein it was also held that even for entering into the premises to meet the obligations under the workmen's compensation Act he has to obtain the Insurance Policy covering the risk of the employees. The Employee State Insurance Act takes care of the health of the employees also and casts an obligation on the employer to provide insurance services. Under these circumstances, this Group Insurance Health Policy though is also a welfare measure is an obligation which is cast under the Statute that the employer has to obey. Section 38 of the Employees State Insurance Act, 1948, mandates that subject to the provisions of the Act, all employees in factories or establishments to which this Act applies shall be insured in the manner provided by this Act. May be the employees also have to contribute but the employer is under an obligation to take an Insurance policy and contribute his share. Therefore, the said Group Insurance Health Policy taken by the assessee is a service which would constitute an activity relating to business which is specifically included in the input service definition. Therefore it is evident that the assessees are entitled to avail Cenvat credit of the service tax on Group Medical Policy and Group Insurance Health Policy.

Conclusion: From the above detailed discussion it can be concluded that the ITC of group health insurance policy of employees would be eligible to the employer company only if it is an obligation on the employer to provide medical facilities to employees under any law for the time being in force.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.