Unlocking GST: ITC on Mobile Phones for Business Purposes [Find Draft Reply Format Here]

The Goods and Service Tax ( GST ) regime, introduced in 2017 has brought a revelation in the  indirect tax system employed in India. Being a unified tax system, the GST Regime has subsumed a number of indirect taxes under its wing. One of the key highlights of the GST Regime is the concept of Input Tax Credit ( ITC ). ITC, in the simplest terms allows businesses to claim credit on the GST paid by them on inputs including goods or services used in the course of furtherance of their business.

The ITC process prevents double-taxation on taxes by ensuring that GST is levied only on the value addition, thereby reducing unnecessary tax burden on businesses.

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The Central Government has rolled out multiple amendments and clarifications to streamlike the GST Regime and ITC process therein including automated matching of ITC with suppliers’ GSTR-2B Returns, improvements in the electronic return filing system among others, yet there often are hitches that are run into by taxpayers.

While ITC can be claimed on a number of goods or services availed by businesses, one specific area for contention is the reversal of ITC on the purchase of mobile phones and the bills arising out of telecom services, when the same have been procured for use by employees in the course of business.

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Are Mobile Phones and Telecom Services Business Inputs?

Mobile phones and telecom services have become essential tools in modern business operations, allowing for seamless communication, data transfer, and service management.

Many companies provide mobile phones to their employees and cover telecom/internet bills to enhance business efficiency. Under Section 16 of the Central Goods and Services Tax Act, 2017 pertaining to the Eligibility and conditions for taking input tax credit, ITC is allowed on goods and services used in the “course or furtherance of business”.

In today’s business landscape, efficient communication is key to growth and mobile phones have become an indispensable element in effectuating the same. Under regular circumstances, one would assume that mobile phones qualify for ITC under the Act, but it is often seen that the Authorities adopt a more restrictive view in certain cases, demanding ITC reversal on mobile phones claiming that they qualify as ‘personal benefits’ meted out to Employees, rather than being linked to business activities.

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ITC Reversal under Section 17(5) of the Central Goods and Services Tax Act, 2017

An argument that can be advanced by taxpayers in this regard is the exclusion of mobile phones or telecom services under “Blocked Credits” under Section 17(5) of the Central Goods and Services Tax Act, 2017. While Section 17 permits ITC on goods or services that may be used partly for business and partly for personal purposes, tax authorities often seek to declassify mobile phones and telecom bills under business purposes.

Mobile Phones, being taxed at 18% and the telecom bills arising out their usage are difficult to quantify separately as mobile phone bills are often consolidated and do not distinguish between business calls and personal calls. As a result, stringent application of the law by Tax Authorities would demand reversal of ITC availed by businesses unless they are able to demonstrate that the devices have been used exclusively for business purposes only.

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Assertions on claiming ITC for Mobile Phones

Though matters pertaining to disallowance of ITC on mobile phones and telecom bills are innumerous, businesses may be able to defend their claim to ITC by adducing sufficient documentary evidence to prove their exclusive usage in the course of furtherance of business.

If businesses are served with Show-Cause Notices demanding reversal of ITC on the purchase of mobile phones and payments of telecom bills arising thereof, the following steps may be undertaken:

Arguments may be made in light of the essential nature of mobile phones as business tools in the present landscape - especially in sales, services or technical purposes. Businesses may implement a clear policy governing the usage of mobile phones and maintain proper records of the telecom bills along with itemized bills or evidence asserting the strict usage of mobile phones for business.

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Further, as no statutory block has been made under Section 17(5) of the Central Goods and Services Tax Act, 2017, businesses can argue in light of the legal basis for the reversal of ITC in this regard.

A key judgment rendered by the CESTAT in the matter of M/s. Wiptech Peripherals v. CCE (2009) held that CENVAT credit on a mobile phone will be eligible even if the cell phones are in the name of employees, provided that the phones are used exclusively for the business of the Noticee. This judgment supports the argument that ITC should be allowed when mobile phones are an integral part of business operations, regardless of the fact that they are issued to employees.

Conclusion:

The subject of ITC Reversal on the purchase of mobile phones and payment of telecom bills arising from the usage thereof still remains a grey area in the GST Regime. In light of the prevailing situation, businesses may be able to counter demand or show-cause notices in this regard by adopting methods of preserving all documentary evidence and maintaining clear policies on the usage of the mobile phones.

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