ITC and CSR Expenses

Background

Corporate entities have been contributing towards social causes, which would be done as mandatory Corporate social responsibility[CSR] contribution, u/s 135 of Companies Act. Also such contributions could be done by entities which do not have a mandatory CSR contribution requirement,and which giveback to society voluntarily in areas such as education of economically backward children, upliftment of weaker segments of society to name a few.

As per the Companies Act, 2013, businesses with specified net worth of Rs. 500 crore or more, or turnover of Rs. 1000 crore or more or a net profit of Rs. 5 crore or more in the immediately preceding financial year are mandatorily required to spend atleast 2% of net profits of the Company towards CSR activities. The compliance of the provisions of CSR under the Companies Act, 2013 i.e. constitution of CSR Committee, formulation of CSR Policy, the spending of requisite amount on CSR activities came into force from April, 2014.

While mere contribution in the form of funds is not under the purview of GST law, the expenses incurred towards purchasing goods/services and contributing them to society and other expenses incurred towards same have suffered GST. The question that arises is whether GST paid on such expenses is eligible as Input Tax Credit (ITC) to the businesses. There has been great deal of confusion in past with regard to availment of the input tax credit on CSR-related expenses, with contradictory decisions and GST Advance rulings. Also in a recent development in Budget 2023, the CSR expenses related ITC is being proposed to be restricted.

In this article, the author has examined the eligibility of ITC on expenses related to CSR, in light of the proposed amendment in Budget 2023.

ITC on CSR expenses-position in light of proposed restriction on ITC

Under section 16 of GST law, the registered person can avail the ITC on goods/services used or proposed to be used in course of business of making taxable supplies/exports/ rated supplies to SEZ unit/developer subject to satisfaction of conditions set out therein.

In Budget 2023,Finance Bill Clause 130. it has proposed as under in section 17(5) of GST law:In sub-section (5), after clause (f), the following clause shall be inserted, namely:- - "(fa) goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013;"

The implication of this proposal is to restrict the ITC on not only goods but also on services used or proposed to be used for activities pertaining to mandated obligations of CSR under section 135 of the Companies Act 2013. Even if there is excess spend on account of CSR beyond the 2%, credit on same could get disputed by dept on grounds that it is not used for the furtherance of business.

Section 17(5) itself starts with a non obstante clause, which means even if Section 16 allows the credit,but Section 17(5) shall block the credit in respect of certain cases. Moreover, Section 17 (5) is a specific provision. It is an established principle that specific provision prevails over general provisions. This doctrine has always been upheld. The cases on the subject would be found in the Third Edition of Maxwell which is ‘generaliaspecialibus non derogant’ - i.e. ‘general provisions would not abrogate special provisions.‘

If there is dispute between Section 16 and Section 17(5), then Section 17(5) overrides Section 16. In other words, if something qualifies for ITC under section 16 but is blocked from ITC under section 17(5) then ITC would not be available.

In light of this proposal, ITC on CSR expenses could get denied once it is notified.

Position on CSR ITC under GST law-prior to the proposed amendment in Budget 2023

Section 16 of GST Act gives conditions for availment of credit by registered person on goods/services used in course of/furtherance of business.

"In the course of business" includes all activities which are incidental/ancillary to the business. Any activity which needs to be incurred as a part of some process in a business is to be treated as "in the course of business". A Company is compulsorily required to undertake CSR activities in order to run its business. As a result, it becomes an essential part of the business process as a whole and thus are treated to be incurred "in the course of business". Considering the wide definition of the term ‘business’ under GST law, there is no requirement to establish a direct one to one linkage in order to avail ITC. Even incidental/ancillary activities are treated as ‘in the course of business’ and procurements made for undertaking such activities are eligible for ITC.

CSR activities undertaken to comply with the requirements of Companies Act, 2013 are incurred in the course of business. Since these activities are incurred in the course of business, they are eligible for ITC in terms of the provisions of CGST Act, 2017. Next the author examines whether the CSR expenses could get restricted in section 17(5)(h) which blocks credit on goods given as gifts? Section 17(5) of the CGST Act sets out the blocked credit list. In section 17(5)(h), ITC shall not be available in respect of goods[moveable property] lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Such restriction to avail ITC is only on goods as gifts [not on services].

The term ‘gift’ has not been defined in the GST law, in which case we may look into definitions under other statutes. The Gift Tax Act has defined the word "gift" to mean transfer by one person to another of any existing moveable or immoveable property voluntarily and without consideration in money or money’s worth.

The Supreme Court cited the definition of ‘gift’ from Corpus Juris Secundum, Volume 38 in Sonia Bhatia v. State of UP [1981] 2 SCC 585 as follows: A ‘gift’ is commonly defined as a voluntary transfer of property by one to another, without any consideration or compensation therefor. A ‘gift’ is a gratuity and an act of generosityand does not require a consideration, but there can be none; if there is a consideration for the transaction, it is not a gift.

It can be concluded from above that gift is gratuitous and does not require consideration. Conver sely if consideration is attached to any transaction, it cannot be called as gift. Love and affection maybe non-legal consideration in respect of a gift, but there cannot be monetary consideration for a gift. Further gift cannot arise under a contractual obligation.

When CSR expenditure is mandatorily required under the law, the expenditure incurred cannot be termed as gift as such expenses are not voluntary in nature. Consequently, the ITC on goods contributed towards CSR activities cannot be restricted under 17(5)(h) of CGST Act and should be eligible in the hands of taxpayers for the periods prior to proposed Budget amendment[From July 2017 onwards till proposed amendment is notified].

As ITC is available to the taxpayer, they will be required to incur additional CSR expenditure to the extent of eligible ITC.

In this context, it is important to note that in EsselPropack Ltd vs Commissioner of CGST, Bhiwandi (2018 (362) E.L.T. 833 (Tri. - Mumbai), while allowing CENVAT on CSR expenses, observed that CSR not only holistic approach but integrating core business strategy since same addresses well being of all stakeholders and not just company’s shareholders. Also, CSR not charity as same having a 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 the corporate world. Hence, the sustainability of a 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 - Impugned order demanding duty, interest and penalty against input service availed hereby set aside…

Further, in the UP AAR in Dwarikesh Sugar Industries Limited Appeal Number: Order No. 52 Date of Judgement/Order: 22/01/2020 it held CSR is a mandatory obligation on a company. The expenses incurred by any company in this regard can be considered as incurred in course of furtherance of business. It is mandatory for company to fulfill this obligation to continue its business. AAR also stated that as it is a mandatory obligation and it cannot be considered as gift. ITC cannot be said to be blocked.

Similarly in recent AAR in re Bambino Pasta Food Industries Private Limited (GST AAR Telangana) (TSAAR Order No. 52/2022)Applicant has donated oxygen plant to AIIMS hospital Bibinagar, YadadriBhongir District, for the benefit of patients who were suffering with low oxygen levels. For this purpose the applicant has purchased PSA oxygen plant and spare parts for that oxygen plant for Rs. 62,74,200 which includes IGST paid of Rs 9,16,200. The applicant is of the opinion that the expenditure made by them comes under the CSR provisions as per Section 135 of the Companies Act, 2013.

It was held as follows:

As seen from the above statutory provisions of the Companies Act, 2013, the Companies with a specified networth or net profit are obliged to incur a minimum of 2 % of their net profit towards their corporate social responsibility and failure to do so will attract penalty under subsection 7 of sec.135 of the said Act which may go upto a maximum of Rs.1 Cr., . Thus, the running of the business of a company will be substantially impaired if they do not incur the said expenditure. Therefore, the expenditure made towards corporate responsibility under section 135 of the Companies Act, 2013, is an expenditure made in the furtherance of the business. Hence the tax paid on purchases made to meet the obligations under corporate social responsibility will be eligible for input tax credit

The Kerala AAR in the case of Polycab wires Pvt Ltd (KER/30/2019, dated 2-3-2019 Advance Ruling No. KER/30/2019) held that ITC is not allowed on goods given as free items under CSR. The AAR in the case of Polycab Wires does not seem to have examined all aspects on CSR, while coming to this conclusion.

It is significant that Advance rulings are applicable to assessee who has applied for such ruling and their set of facts. It has limited persuasive value for others and could be followed when in line with provisions of law, which Essel and Dwarikesh supra seem to be.

Conclusion

In light of the latest proposed amendment the credit on CSR expenses u/s 135 of the Companies Act would be restricted once it is notified. The said provision being oppressive to taxpayers would be applicable prospectively and not retrospectively for past periods.

The author can also be reached at roopa@hiregange.com