ITC on residential dwelling occupied by the employee is allowed to the employer?

With the withdrawal of the GST exemption on the services by way of renting of residential dwelling for use as a residence when provided to a registered person (RP), an important question that arises is whether the RP is eligible to claim ITC of the GST applicable therein if the residential dwelling is occupied by his employees.

The question arises because of the restriction placed u/s 17(5)(g) wherein ITC is restricted in respect of the goods or services used for personal consumption.

While one school of thought is that the services being personally consumed by the employee, ITC cannot be availed, the other view is that the GST paid by the employer is in the course of his business and a mere personal consumption by the employee will not affect the entitlement.

I personally concur with the view expressed by the latter school while I have my own reasons in its favour. However, it is relevant to refer a recent ECJ ruling where an almost similar question has been answered.

It’s a case before the ECJ that whether the employer is eligible to claim VAT credit of the reverse charge VAT paid by him on purchase of retail vouchers that are offered by him to the employees as a part of a recognition programme to reward the most deserving and high-performing employees

Below are a few notable points from the ruling;

- The purpose of the VAT provision to consider a supply even without a consideration is to prevent a taxable person who has been able to deduct VAT on the purchase of such supplies used for his business from escaping payment of that tax when he applies those supplies for private use of his staff and thereby enjoying advantages over any ordinary consumer who pays VAT on such supplies

- However, in the present case, the programme is designed with the aim of improving the performance of its employees which in turn contributes to better profitability of the business.

- the setting up of that programme was dictated by considerations relating to the proper conduct of the employers business activities and the pursuit of additional profits

- the resulting advantage for the employees is merely incidental to the needs of the business. By helping to reinforce the motivation of employees, that programme has positive effects in terms of performance and profitability.

- the supply leads to the proper functioning and profitability of the business, hence, not carried out for purposes other than those of the business

- since the retailers who redeems these vouchers declare output VAT on the value of the retail vouchers at issue, the principle of fiscal neutrality is also not infringed

In case of renting of a residential dwelling too, VAT neutrality remains. If the employee directly lease a residential dwelling for his residence, GST is exempt. When the employer does that for him, the neutrality is achieved only when the GST paid by the employer is available as a credit.