Corporate Social responsibility (CSR) is a self-regulating process, through which corporate link their activities with common public. The Corporate generally using resources, whether it is natural or human to amass big profits and through CSR, they will take social responsibility to develop local area and people living in that area. The Corporate through Social Responsibility shall be accountable to the itself, country and the public.
The Corporate Social Responsibility also called as Corporate Responsibility, Corporate Citizenship. Through CSR, Corporate consider the interest of society by taking responsibility of impact of their activities on the various stakeholders.
The provisions of Section 135 of the Companies Act, 2013 mandates that; Every company having net worth of rupees five hundred crores or more or turnover of rupees one thousand crores or more or a net profit of five crore or more during any financial year shall ensure that the Company spends, in every financial year , at lease two percent of the average net profits of the company made during the three immediately preceding financial years.
As we know the expenditure by Corporates on CSR activities are not allowed as deduction from the profit of the company under Section 37 of the Income Tax Act, 1961 (although deduction can be availed under other Sections like 80G, if eligible therein ) as such expenditure on CSR is considered as appropriation of profit.
Now the question arises as to whether a Company can avail input tax credit (ITC) in respect of GST paid on CSR Expenses. Although in some of the CSR spends, GST would not have been applicable like donation to PM Cares Fund and accordingly, in such cases, the question of availing of any ITC does not arise.
Overview of ITC under GST law
Before deliberating upon eligibility of ITC on GST paid on CSR expenses lets have a brief overview of the ITC provisions under GST Law.
Section 16(1) of the CGST Act, 2017 provides that every registered person shall, subject to such conditions and restrictions as may be prescribed and, in the manner, specified in section 49,
be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. \
Section 16(2) of said Act imposes certain condition for availing the credit as under:
- The recipient should be in possession of valid tax invoice or debit note or such other prescribed
documents. - The supplier of the goods or services should have reported the said invoice in his GSTR- 1 and same is communicated to the recipient in GSTR-2B. (This condition is proposed by Finance Act 2021 but to be notified as on date)
- Receipt of the goods or services or both
- Tax leviable on supply must be paid to the Government by the supplier subject to the provision of section 41 (ITC on self-assessment basis) and 43A (not yet notified) of the Act.
- The recipient must have furnished the return i.e. GSTR-3B under Section 39 wherein the ITC will be availed.
The other additional conditions than needs to be fulfilled are as under:
- Depreciation on the GST, which is availed as credit should not be claimed as per the Income Tax Act (Section 16(3)).
- GST to be availed within the time limit, that is earlier of the date of filing or annual returns or September following the end of financial year. (Section 16(4)).
Further there are some instances of blocked credits as mandated under Section 17(5) of the CGST Act, 2017 wherein ITC cannot be availed even if the goods or services are used for purposes of business.
Whether ITC can be availed on GST paid on CSR Expenses?
Now after going through the overview of the ITC provisions under GST law, now let’s deliberate upon eligibility of ITC on the CSR expenses. As was discussed earlier, CSR expenses by giving it as a donation to the fund like PM Cares Fund or charitable organization is not subject to GST and therefore the question of taking ITC thereof does not arise.
Thus the question of ITC only arises in cases where CSR projects are being undertaken or any goods or services have been procured wherein the supplier has charged GST from the Companies. For example, if a company buys an oxygen concentrator from a vendor by paying the applicable GST, and later donates the same to a hospital, now can a Company avail ITC thereon? Likewise, Companies built toilets in villages under CSR initiatives through agencies that charged GST. Can ITC be availed of such GST paid?
Is CSR Expenses incurred in course or furtherance of business
As discussed under Section 16 supra for availing ITC it is a precondition that the goods or services should be used or intended to be used in the course or furtherance of his business. This point is debatable as persons may argue that CSR Expenses are sort of charity and not linked to the business.
However it should be noted here that CSR spend is a statutory requirement under the Companies Act, 2013 failing which there would be a non-compliance leading to the penalty and various other consequences (including deposition of unspent amount on Government fund as per recently amended provisions) and hence one has to have a mandatory spend which makes it an expenditure in the course of the business, the fact that there is not any direct benefit for the businessman may not have relevance here.
Whether the goods purchased and donated under CSR would that be goods disposed as gift?
Another impediment in availing of ITC on CSR expenses is the restriction as provided under section 17(5) (g) (h) which blocks credit on “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples”. The relevant portion of this restriction in the perspective of CSR spends is goods disposed by way of gift.
Before concluding on this we need to understand the terms “disposed” and “gift”. The dictionary meaning of dispose as given in Merriam Webster online dictionary is ‘to get rid of’ or ‘to transfer to the control of another.’ This is something which is given away since to get rid of the same and not with an objective to be use for the recipient.
The meaning of the gift ibid is ‘something voluntarily transferred by one person to another without
compensation’ so from this meaning it is clear the donation is also gift, for a gift to be donation there must be an angle of charity or humanity. Although goods donated for the charity is a gift but the same is not disposed but has been given based on the specific need assessment, this restriction would not apply.
In our view the goods given as donation under CSR cannot be regarded as goods disposed of as gift, as same is not voluntarily transferred and is rather incurred as per the requirement of Companies Act, 2013. Further needless to say that this restriction is in any which case would not apply for the services.
Is Donation of goods under CSR be regarded as deemed supply
In case ITC is availed on goods which are donated under CSR initiative, whether such donation would be subjected to GST as supply of goods?
In this regard we need to refer to Para 1 of Schedule I of the CGST Act which mandates activities to be treated as supply even if made without consideration. Para 1 of schedule is reproduced below:
“Permanent transfer or disposal of business assets where input tax credit has been availed on such assets”
As already discussed in the case of CSR spends there is no disposal. Whether the same is permanent transfer of business asset would be a question. As discussed earlier this is no doubt business expenditure however would then be a business asset. In case the goods which have been bought is for the sole purpose of donating as a part of the CSR spend they would be directly be accounted for as CSR Expenses and not accounted for as stock (current asset) of the company or the capital asset (fixed asset) of the company. It is similar to stationary purchased by the company; which is treated as an expenditure (business expenditure) but not as an asset of the company. In view of above donation of goods under CSR on which ITC is availed, would not be regarded as deemed supply.
However, in case any asset which was earlier capitalised in books being used for business and later is donated, Para 1 provisions regarding deemed supply will be triggered.
Important case laws allowing ITC on CSR Expenses
- Essel Propack Ltd. Vs. Commissioner Of CGST, Bhiwandi [2018 (362) E.L.T. 833 (Tri. – Mumbai)]
CESTAT, WB, Mumbai held that “CSR not only holistic approach but integrating core business
strategy since same addresses well-being of all stake holders and not just company’s shareholders. Also, CSR not charity as same having direct bearing on manufacturing activity of company that is largely dependent on smooth supply of raw materials. CSR also augmenting credit rating of company as well as its standing in corporate world. Hence, sustainability of company dependent on CSR without which companies cannot operate smoothly for long period as they are dependent on various stakeholders to conduct business in economically, socially and environmentally sustainable manner i.e., transparent and ethical.”
- Sterlite Industries (I) Ltd. Vs Commissioner of Central Excise, Madurai, [2016 (41) S.T.R. 867 (Tri. – Chennai)]it was held So far as art work is concerned, it is explained that it is business
related expenditure to discharge social responsibility. He is correct to say that for no contrary finding against the appellant nor also the authority has found anything not connected to business activity. Therefore, Cenvat credit on that part is allowed. - Commissioner of C. Ex., Bangalore-II vs Millipore India Pvt. Ltd. 2012 (026) STR 0514 Kar. it was held that now the concept of corporate social responsibility is also relevant. It is to discharge a statutory obligation, when the employer spends money to maintain their factory premises in an ecofriendly, manner, certainly, the tax paid on such services would form part of the costs of the final products. In those circumstances, the Tribunal was right in holding that the service tax paid in all these cases would fall within the input services and the assessee is entitled to the benefit thereof.
Advance Ruling : Contradictory views
- Dwarakesh Sugar Industries Ltd, Uttar Pradesh AAR 2020-TIOL-305-AAR-GST has ruled for
the questions:
Whether expenses incurred by the Company in order to comply with requirements of Corporate Social Responsibility (CSR) under the Companies Act, 2013 (‘CSR Expenses’) qualify as being incurred in the course of business and eligible for input tax credit (‘ITC’) in terms of the Section 16 of the’CGST Act, 2017? – Yes.
Whether free supply of goods as a part of CSR activities is restricted under Section 17 (5) (h) of CGST Act, 2017? – No.
The ruling has also made following observations:
- The applicant is compulsorily required to undertake CSR activities in order to run its business and accordingly, it becomes an essential part of his business process as a whole. Therefore, the said CSR activities are to be treated as incurred “in the course of business”.
- CSR expenses are not incurred voluntarily, accordingly, we are of the opinion that they do not
qualify as ‘gifts’ and therefore its credit is not restricted under Section 17(5) of the CGST Act,
2017.
2. In Poly cab wires Pvt Ltd, Kerala AAR case the applicant distributed electrical items like switches, fans, cables etc. to flood affected areas of Kerala under CSR initiative. The distribution of such items was made at free of cost.
The Authority held that as per section 17(5) (h), the ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Thus, the applicant was denied input tax credit on such free goods distributed as per section 17(5) of CGST and KSGST by Kerala AAR.
Although the advance ruling applies only to the person who seeks such ruling from the authorities. , however it still have persuasive value and therefore the contradicting Advance Ruling will definitely invite litigation in case ITC is availed on CSR expenses, which needs to be contested by the taxpayer till it reaches finality.
Conclusion:
Unlike Income Tax, GST law doesn’t have any specific provisions including restriction in regard to eligibility of ITC on CSR expenses. Considering the divergent opinion of various advance ruling authorities the Government should come out with clarification thereon to evaporate doubts in this regard. A positive clarification in this regard would be appreciated as in this Covid pandemic situation companies, which are contributing to the wellbeing of the society must be encouraged and supported to contribute more.
However another view of seeing this is as a Company is anyway required to spend 2% of profits as CSR expenses and thus even if it avail ITC benefit it would anyway be required to spend more to the extend of ITC availed (which will reduce the CSR expenses) and thus in real sense there is no benefit to the Company as such. Thus instead of inviting litigations the Company may not avail ITC until clarification in this regard is issued by the Government.
***
Follow us for free tax updates : facebook Twitter
Subscribe our portal and get FREE Tax e-books , quality articles and updates on your e-mail.
Resolve your GST queries from national level experts on GST free of cost.
CA. Mohammad Salim is an ICAI award winning Chartered Accountant having rich experience of more than 20 years in the field of indirect taxes. He is the Member, Indirect Taxes Committee of PHD Chamber of Commerce and Industry. He is author of four successful books on GST published by Taxmann Publication and is also GST expert on taxmann portal.
