GST On Employee Medical Insurance

On April 15th, 2020, the government took a historic step
towards its goal to get the entire Indian population insured. As a
part of order
No. 40–3/2020-DM-I (A) (Issued as
consolidated revised guidelines by the Ministry of Home Affairs), it
was made mandatory for every employer, who continues their
business operation post-COVID-19, to provide medical insurance to their
employees. To execute the guideline on the grass-root level, the Insurance
Regulatory and Development Authority of India (IRDAI) issued a
guideline asking every standalone and
general health insurer to provide comprehensive medical
insurance for employees in India to enable the
listed businesses/employers/establishments to comply with
the directives given by the Government of India. It also highlighted
that the businesses should provide medical insurance policies
not just in the present situation but even after the COVID situation
subsides.
Workmen Compensation Insurance
is mandatory under The Workmen’s Compensation Act, 1923, in India. It is
important for both the employee and the employers. In India, for all
manufacturing units with more than 20 employees, having a Workmen's
Compensation Insurance is mandatory to have insurance benefits for workers or
employees as per the Employees’ State Insurance Act, 1948. Likewise, for all
companies or manufacturing units with less than 20 employees, it is important
to ensure Workmen’s Compensation Insurance according to the Workmen's
Compensation Insurance Act, 1923 and Indian Fatal Accidents Act, 1855.
Every company as per their HR policy will offer
medical cover for their employees. Now this medical cover can be for the
employee alone or his immediate family or can be extended to cover his parents
or in-laws also. Here there are varying practices being adopted by the firms to
dole out this benefit. Let us see some of these cases:
1. The company gives medical insurance
policy to the employee only, wherein the entire premium is paid by the company
– In this case, if the coverage is obligated under the above two legislations,
then the ITC of the GST paid on such premiums is eligible in the hands of the
company. There is no limit prescribed under law for such a coverage, so that
company can decide the same.
2. The company gives medical insurance
policy upto a certain claim amount say INR 3 lakhs and also offers an optional
cover beyond INR 3 lakhs for which the company collects a subsidized or full
amount of such additional premium from the employee. In such a case, the
company can avail ITC on the GST paid on the original policy for a coverage of
upto INR 3 lakhs only. But for the additional coverage beyond the amount of INR
3 lakhs, the company has to structure the transaction as pure agent in extending
such a benefit. However this is prone to litigation as many such cases are
decided in favour of revenue, wherein the authorities are rejecting the claim
of company being a pure agent and are insisting on payment of GST on such
reimbursements from the hands of employees.
3. The company gives medical coverage to
the immediate family members of the employee and may subsidize the premium. If
the medical policy is a family floater including the employee, then ITC on such
premiums will be denied in the hands of the company as the above two
legislations do not cover the immediate family of the employee and hence are
not obligatory under any law for the time being in force.
4. The company provides medical
insurance to cover either parents or in-laws of the employee, wherein the
entire premium is recovered in installments from the employee over a period of
time. Here the benefit for the employee would be lesser premium as the company
negotiates the policy, coverage from day one and also coverage for pre-existing
diseases etc. But since this is not in relation to the business on hand for the
company there is no question of any ITC being eligible for them. However the
hidden interest free installments will become the bone of contention between
the department and the company. Here the company may evaluate the options
available before them keeping in mind the point (2) of Schedule I of the CGST
Act, 2017 wherein it states that “Supply of goods or services or both between
related persons or between distinct persons as specified under Section 25 when
made in the course or furtherance of business” are to be treated as supply even
without consideration and are subject to tax. But the proviso states that gifts
not exceeding a value of fifty thousand rupees in a financial year by an
employer to an employee shall not be treated as supply of goods or services or
both. Since this provision talks about an activity done in the course of
business or in furtherance of business, the authorities are finding it
difficult to establish a link between the benefit extended to the parents or
in-laws of employee to the business requirements.
As can be seen in all these above
cases, where the insurance is obligated by the law also, it is not easy for the
companies to avail the input credit on the GST paid on the premiums. The GST
law treats the employer and employee as related parties and causes many
troubles for the transactions between them and the leverage given under
Schedule I of the CGST Act, 2017 to the extent of INR 50,000 per employee per
financial year is not adequate to cover all such cases. Hence it is time that
the authorities revisit these aspects and come with clarity.