ITC on CSR activities under GST

Background

The question “whether Input Tax Credit (ITC) is admissible on expenditure incurred by a company towards CSR activities as per the provisions of Companies Act, 2013” has been an issue of confusion and ambiguity. GST law does not specifically speak on this issue and the government has not come out with any clarification thereon. The matter has become more problematic due to divergent opinion of various advance ruling authorities (ARA). In this article, we would like to discuss the above issue in the light of the provisions of Companies Act, 2013, CGST Act, 2017 and ruling given by various ARA.

What is Corporate Social Responsibility (CSR)

Every business operates in a social environment so they have to be socially accountable by serving the cause of society. Corporate Social Responsibility (CSR) is nothing but the responsibility cast on every corporate entity to fulfil their social aspirations by contributing towards various social causes like medical, health, education, employment etc.

What is CSR requirement under Companies Act, 2013

Section 135(5) of the Companies Act, 2013 requires every specified company to contribute towards CSR. According to this section, every specified company is mandatorily required to make CSR expenditure in every financial year atleast 2% of the average net profits of the company made during the immediately preceding three financial years by following its CSR policy. Further, the company shall make appropriate reporting of CSR activities in the Board reports.

The specified companies for the purpose of CSR are: -

A company with net worth of Rs. 500 crore or more
A company with turnover of Rs. 1000 crore or more
A company with net profit of Rs. 5 crore or more

Every company which meets any one of the above 3 criterion during the immediately preceding financial year shall make CSR expenditure in the current financial year minimum @ 2% of the average net profits as calculated above.

What are the types of CSR activities in India

Various types of CSR activities which may be undertaken by the corporates are specified in Schedule-VII to Companies Act, 2013. Some of the activities are given here below: -

Eradicating hunger, poverty and malnutrition
Promoting education
Promoting gender equality, women empowerment
Environment sustainability, animal welfare, agroforestry, conservation of natural resources
Contribution to Clean Ganga Fund
Protection of national heritage, art and culture and development of traditional art and handicrafts
Measures for the benefit of armed forces veterans, war widows and their dependents
Promotion of sports
Contribution to PM National Relief Fund/ PM Cares Fund
Contribution to incubators and R&D projects
Rural development projects
Slum area development
Health care including preventive health care and sanitation activities
Spending towards Covid-19 relief

Now, we will discuss certain provisions of CGST Act, 2017 to understand the implication of GST law on CSR activities. Section 16(1) of the CGST Act, 2017 provides for the eligibility for taking ITC. Section 16(1) states as below: -

“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.”

Further, the term “Business” is defined by Section 2(17)(b) of CGST Act to include: -

Any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
Any activity or transaction in connection with or incidental or ancillary to above

Thus, reading the above two sections in concurrence, we can say that ITC is admissible for inputs used in the core activity of the business but also the activities which are ancillary to such core activities. As discussed above, CSR activities are mandatorily to be carried out by the companies in compliance of Section 135 of the Companies Act, 2013. Non compliance of CSR provisions might lead to penal provisions for the companies. Therefore, we can safely conclude that CSR activities are made by every corporate entity in the course or furtherance of business and shall form part of ancillary activities performed by the company. As such, the ITC in respect of inputs, input goods or services utilized in the course of such CSR activities should be allowable. However, this argument may not hold good in case of non-corporate entities.

But before forming a final conclusion, we should also look into Section 17(5) of CGST Act, 2017 which covers the cases where ITC shall be blocked. Clause (h) of Section 17(5) blocks ITC in respect of goods lost, stolen, destroyed, written off or disposed off through gift or free samples. CSR activities involves expenditure where goods or services are given by a corporate entity free of cost to fulfil social aspirations. But, distribution of any goods free of cost under CSR can not be taken at par with ‘Gift’ because ‘Gift’ is a gratuitous or voluntary act of giving anything whereas CSR activity is not voluntary but a statutory requirement imposed by Companies Act upon the companies. So, in our opinion, CSR expenditure is not in the nature of gift. Therefore, ITC on inputs utilized towards rendering CSR activities should be admissible.

CENVAT Credit on CSR in pre-GST regime

In the case of Essel Propack v. Commissioner (2018) 362 ELT 833 CESTAT- CSR is a mandatory requirement for the public sector undertakings which has also been made obligatory for the private sector and unless the same is to be treated as input service in respect of activities relating to business, production and sustainability of the company itself would be at stake. Hence, CENVAT credit was allowed to the appellant in respect of CSR expenditures.

ITC on CSR activities in GST regime

However, the confusions started in GST regime due to divergent rulings by Advance Ruling Authorities. A controversial ruling was given by Kerala authorities in the matter of Polycab Wires Private Limited.

Polycab Wires Private Limited- Advance Ruling

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 ARA. The ruling by Kerala Authorities in the matter of Polycab Wires is completely opposite to judgement in Essel Propack matter. The confusion was further hiked due to yet another ruling which was given by UP authorities in the matter of M/s Dwarikesh Sugar Industries Limited as below:

Dwarikesh Sugar Industries Limited- Advance Ruling

The applicant is a company engaged in the business of sugar production and trading thereof. The company undertakes CSR activities in terms of section 135 of Companies Act for which it procures various goods and services on which GST is charged by the supplier. Following questions were put before Advance Ruling Authorities: -

Whether expenses incurred by the company to comply with the requirements of CSR under Companies Act qualify as being “incurred in the course of business” and eligible for ITC under GST laws?

Verdict: -

The companies are mandatorily required to incur CSR expenditure in compliance with the Companies Act, 2013. Non-compliance of these provisions may lead to business disruptions. The term “gift” has not been defined under the CGST Act. However, a gift is provided to someone occasionally without consideration and is voluntary in nature. A clear distinction needs to be drawn between “gift” and supplies made under CSR. While the former is voluntary and occasional, the latter is obligatory and regular in nature. CSR expenses incurred by the applicant have been mandated under the Companies Act and it is therefore the Applicant’s obligation to incur such expenses. Therefore, the CSR activities are to be treated as incurred “in the course of business.”

Whether free supply of goods as part of a company’s CSR activities is restricted under section 17(5)(h) of CGST Act?

Verdict: -

Since, CSR expenses are not incurred voluntarily, accordingly, they do not qualify as “gifts” and therefore, its credit not restricted u/s 17(5)(h) of the CGST Act, 2017.

Whether goods and services used for construction of school building and not capitalized in the books of accounts restricted u/s 17(5)(c)/(d) of CGST Act?

Verdict: -

Section 17(5)(c) and (d) of CGST Act have specifically restricted ITC on construction and works contract service to the extent of capitalization. Accordingly, the ITC of goods and services used for construction of school building will not be available to the applicant to the extent of capitalization.

Conclusion:

The ruling by UP authorities in the matter of M/s Dwarikesh Sugar India Limited has correctly observed the law in respect of ITC with regard to CSR activities. CSR activities though not directly linked to business activities of a company, these give an indirect benefit to the company and help in improving its social image. CSR activities are compulsory for a company and non-compliance of law might render company and its office bearers punishable under Companies Act, 2013. Thus, performing CSR activities are must for a company for its effective & smooth functioning. Further, section 17(5)(h) of CGST Act cannot be applied in case of CSR activities because CSR expenditure can not be equated with “gifts”. Therefore, ITC can not be blocked under clause(h) of section 17(5) of CGST Act, 2017. Hence, ITC shall be admissible for inputs utilized towards CSR activities.

But it should also be kept in mind that advance ruling applies only to the person who seeks such ruling from the authorities. Therefore, a clear clarification should be given by the Government to put an end to ambiguity and confusions in the law in this issue.

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