GST IMPLICATIONS ON “FREE OF COST” SUPPLY OF OXYGEN

The Hon’ble Prime Minister said that “the government, the states, the industry and the transporters, and all the hospitals need to come together and work in unison. The better the synergy and coordination, the easier it will be able to deal with this challenge”.  The “challenge” he was referring to, was the challenge of meeting the massive demand of life saving oxygen gas, pursuant to surge in Covid cases. Further, he promised “full support” to the above warriors in combating the Crisis.

Further, the supply of industrial oxygen was majorly diverted for medical purposes vide MHA order dated 22^nd April 2021 [40-3/2020 DM-I(A)], issued under the Disaster Management Act, 2005. The said order fully restricted the Industrial use of oxygen except for nine industries, few of them are – Steel Plants, Pharma, Nuclear, Cylinder manufacturers etc. The said order also facilitated free movement of vehicles carrying oxygen – across India.

Sooner, the above measures took place, the industrialists started walking shoulder to shoulder with the Government and their capacity was fully utilized for saving life’s, as a part of their corporate social responsibilities. Also, the Ministry of Corporate Affairs vide circular 09/2021 dated 05/05/2021 clarified that – spending of CSR fund on creating health infra, manufacturing and supplying oxygen etc. are eligible CSR activities. In this background, let us understand the GST implication on such free of cost supplies of oxygen. 

The production of oxygen involves usage of “Air Separation Units” wherein oxygen is separated from nitrogen and other inert gases to produce pure oxygen which is further used for Industrial and medical purposes. The broad difference between the medical oxygen and industrial oxygen is that, the medical oxygen is highly pure and involves no contamination whereas, industrial oxygen is less pure and are not suitable for medical use. Accordingly, there are strict guidelines for ensuring purity levels in the manufacture of medical oxygen. Considering their usage, separate rates of GST have been specified under Notification no 1/2017 CT(R), as below:

In line with the above, a taxpayer needs to charge 18 % GST if he supplies industrial oxygen, and 12 % GST is charged for supplies of medical oxygen. Now, a question arises whether these rates are applicable when the oxygen is supplied on Free of cost basis?? The answer to this lies within the definition of “Supply” which has been analyzed for below two prevalent situations:

1. Oxygen is delivered to the recipients on free of cost basis (i.e., including transportation).

The term “supply” has been defined under Section 7 of the CGST Act, as per which supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease, or disposal made for a consideration by a person in course of furtherance of business. Further, certain specified activities stated in Schedule I to the CGST Act, would also be covered in the ambit of scope of supply even if made without consideration.

In the present situation, the non - existence consideration cannot be doubted, the industries supplying oxygen on free of cost basis and there is no quid-pro-quo in return from the recipients or from any other person and hence in view of the author – the test of “supply fails”. Further, such supplies should not get covered in schedule I entry i.e. “Permanent transfer and disposal of business assets where input tax credit has been availed on such assets” on account of reasons that medical oxygen manufactured by supplier may not get covered within the term “business assets”. At a moment even if it is presumed that it is business assets, it may not get covered in schedule as ITC is not taken on “such” assets but on the input, input services and capital goods which are used for manufacturing of such goods.

Thus, author is of the view that there is no GST liability on the supply of oxygen without consideration.

Next question arises that when GST is not liable on the removal of oxygen without consideration, whether there is need of reversal of ITC.

Reference could be drawn towards Section 17(5) of the said Act, which creates a blockage to ITC which is otherwise eligible under GST. Entry (h) to the said section says - “input tax credit shall not be eligible in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples”.

The word ‘gift’ has not been defined in the CGST Act. However, in terms of Hon’ble Supreme Court in the matter of Sonia Bhatia v. State of UP [1981] 2 SCC 585 – gift is something “voluntary” and involves no consideration.

In view of the authors, the CSR expenses are mandatory in nature and thereby obligatory by the law. Therefore, the same falls outside the ambit of the term “gift” and hence the credit in respect of CSR Compliance is not blocked by virtue of section 17(5)(h). This view is also supported by the case law Essel Propack Ltd. Vs Commissioner of CGST, Bhiwandi (CESTAT Mumbai) dated August 31, 2018 where the CENVAT Credit was allowed relating to CSR expenses.

To sum up the author is of the view that, consideration is essential ingredient of “supply” and wherever it is absent, the “supply” fails and so in the present case. However, counter argument exists in terms of Schedule I ibid. So far as ITC is concerned, wherever oxygen is supplied as a part of CSR activity, the same does not tantamount to “gifts” and thus not blocked by Sec 17(5)(h).

2. Cost to the extent of transportation is recovered and oxygen is supplied on FOC basis.

The said transaction would have similar implications as above, however since the transportation cost is only being recovered and the parties are unrelated to each other, the “transaction value” would be accepted as the value for charging GST (in terms of Section 15 ibid.) and therefore the transportation cost recovered would be subjected to GST and not the market value. Further, there would be no blockage of ITC in this case.

In view of the author, since the chain of ITC would end up in hospitals and the benefit of ITC would not be passed on to the patients, it is suggested to have a “to-pay billty” where-ever there are independent transporters involved, as majority of the hospitals are unregistered and would not be required to discharge RCM liability on GTA services in terms of entry 21A of Notification 12/2017 (CT). This will ensure cost savings to the ultimate patients.

Conclusion

Considering the tough times of Covid, the industries would be expecting support from the Government to provide clarity on the implications of above provisions and relaxing GST implications, wherever necessary, to provide relief to the industries serving the nation at these tough times.

The authors with the help of this article wishes to highlight the issues faced by the angel industries which needs immediate resolution from Government side. The views are strictly personal.