There is one area which is commonly miss out by the taxpayers for claiming input tax credits (ITC) is “Reimbursable employee expenses”. The primary reason behind this is that unlike regular business purchases, employee spend is not adequately captured in regular business workflows. Here in this article we will go through the process of getting some extra credit.
At first , familiarise yourself with the practices of 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 an 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.
However , 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.
If employee is purchasing goods or services from a GST registered supplier, they would be charged GST for the said transaction. Once reimburse employee in full, employer 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.
There are few challenges faced in this process . The biggest challenge 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 retaining the invoices related to these transactions for the upcoming tax season. In most cases, SME 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 photo 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 by the finance team while filing tax returns.
This is one of few ways to save extra money as well as time.