- By Sivaramakrishnan Iswaran
GST and Taxation for MSMEs: We are going through unprecedented times coupled with rising market uncertainty. This has left well-established firms scrambling to restructure their business operations to keep their business afloat and their cash flow steady. At times like these when funds are critical, you would not want to leave any money on the table. One area where we’ve observed most businesses miss out is on claiming input tax credits (ITC) on reimbursable employee expenses. The primary reason behind this is the fact that unlike typical business purchases, employee spend is not adequately captured in regular business workflows.
However, it’s not too late now! You can still grab the opportunity to save some additional funds by capturing all employee spend. All you have to do is familiarise yourself with the practices and to help you with that, this article will walk you through the different types of expenses incurred by employees, the corresponding GST treatments, and how claiming tax credits can be simplified with a streamlined expense management system. To begin with, as per the GST laws, since an employee takes the role of a mediator or agent who spends on the employer’s behalf, the purchases are considered to have been made by the employer itself. Therefore, you can claim ITC on the expenses incurred by your employees once you have reimbursed them for the same.
In order to claim ITC, a transaction should satisfy the following conditions –
- The expenses incurred by your employee must be incurred for the advancement of your business.
- The expenses must be related to employment and reimbursable in nature.
- The transaction must be accompanied by a GST invoice issued by the supplier. This invoice must contain the name and GSTIN of your business as the recipient.
For example, ITC can be availed on expenses like air travel, accommodation, cellular or internet service, and transportation of goods for sale provided the above conditions are satisfied. However, ITC cannot be claimed on certain products and services that are listed under Section 17(5) of GST – Apportionment of Credits and Blocked Credits. These include restaurant services and health services.
Now that we’ve seen the various conditions you must follow in order to claim ITC, let’s look at how the GST treatment of the expenses varies based on the registration status of the supplier.
If your employee is purchasing goods/services from a GST registered supplier, they would be charged GST for the said transaction. Once you reimburse your employee in full, you can claim ITC for the GST amount paid. However, if the supplier is not registered under the GST regime, they cannot charge GST or issue a GST invoice, so claiming tax credits is not applicable here.
Handling ITC the easy way
The biggest challenge here is to keep track of all these transactions, segregate them based on their eligibility for ITC, and then claim the tax credits. Another challenge is in retaining the invoices related to these transactions for the upcoming tax season. In most cases, SMEs lose out on claiming ITC due to employees either losing the receipts or submitting them late. This impairs the firm’s ability to report the expense and claim ITC within that tax period.
However, having an effective travel and expense management system that is connected to your accounting system can spare your finance team the trouble and help them focus on getting the maximum possible ITC. A mobile-friendly expense management system ensures the timely submission of receipts. Now, all your employees have to do is take a picture of the receipt and upload it in the system. The transactions can be categorised based on the type of expense, and those transactions that are eligible for ITC can be checked off from your accounting system for easy filing. Once you have your ITC-eligible transactions sorted, and the corresponding receipts stored securely in the cloud, they can be uploaded to the GSTN portal easily by the finance team while filing tax returns. At the end of it your firm can save a good amount of time and money.
Tracking and managing employee spend plays a pivotal role in any business. This is why firms all over India have welcomed the GST reform that allows them to save big on their employee expenses by claiming ITC. Along with having tight expense policies and efficient teams in place to optimise spend, this is yet another way to help you save money.
Sivaramakrishnan Iswaran is the Vice President at Zoho Corporation. Views expressed are the author’s own.