ITC on CSR expenditure and CSR under Companies Act, Income Tax Act & GST

“Explore the implications of Corporate Social Responsibility (CSR) expenditures under Companies Act, Income Tax Act, and GST. Gain insights into tax laws, deductions, and proposed changes. Stay informed to make informed business decisions.”

Bird eye view on GST credit availment on CSR (Corporate Social Responsibility) expenditure & CSR under Companies Act, Income Tax Act, GST.

In this article I am going to discuss (or) give short glimpse on origin of CSR Corporate Social Responsibility) expenditure and the relevance of the same under Tax Laws i.e. GST and Income Tax. 

Income Tax: CSR expenditure not allowed as business expenditure.

GST: Department in arbitrary manner stating that ITC on CSR expenditure is blocked. This words they are making without proper support of statutory provisions.

With this article I am trying to analyse the same in neutral manner.

Companies Act, 2013

Sec. 135:  Corporate Social Responsibility

Every Company having:  

1. Net worth of 500 crore or more

Or

2. Turnover of Rs.1000 crore or more

Or

3. Net Profit of Rs. 5 crore or more, ,

in previous financial year.

The above qualified Companies has to spend at least 2% average net profit of last 3 years as CSR expenditure.

If company defaults in spending or making alternative for the above by transferring the same to special account, penalty will be as under:

For Company: Amount defaulted (or) one crore rupees, whichever is less

For Company officer: one-tenth of amount defaulted (or ) two lakh rupees, whichever is less.

Learnings: from the above it is clear that statute giving more importance for the CSR spends.

Failure of the same end up with huge penalties.

Income Tax Act 1961:

Corporate Social Responsibility expenditure kept as a non-business expenditure, by inserting the Explanation 2 to the Section 37 of Income Tax Act.

37 (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. 

Learnings: From the above we can conclude that we can take deductions for the amount spent on Corporate Social Responsibility while computing the business profit if the expenditure fall under Section 30 to 36.

The restriction only if the spending’s are not covered under Sections 30 to 36 of Income Tax Act.  

GST (Goods and Service Tax Act):

1. Eligibility of Input tax credit on Corporate Social Responsibility Under GST:

Department is arguing that CSR expenditure squarely covered under Sec 17(5) (h), so ITC blocked.

My view:

Section 17(5) (h) covers “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples”

CSR expenditure not covered under above clause as the Companies not spending amount as a “GIFT”

Let us understand the Gift:

Gift is not defined under GST Act, so we need to understand the Gift meaning from normal business parlance.

Gift stands on 3 pillars = Without consideration + Voluntary in nature+ Made occasionally  

Voluntary in nature:  From the discussion of Companies Act, we can conclude that CSR expenditure is obligatory in nature as per statute, for not following the same there will be imposition of huge amount of penalty as per Companies Act.

So, Companies are spending the same as there is an obligation existed on them as per Companies Act.

So, CSR expenditure not satisfies “Voluntary in nature” condition which is essential pillar of Gift.

Based on the solely reliance on the above, I can conclude CSR expenditure not covered under Sec 17(5) h.

2. Whether CSR fit under any other clause of Sec 17(5)?

As per my knowledge, there is no clause in Sec.17 (5) to accommodate the CSR expenditure.

And also, it satisfies all the conditions for Sec.16.

3. What is the proposed budget changes for CSR:

Government proposed to insert clause (fa) in section 17(5) to deal specifically with CSR.

“(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;”

4. What is the impact of proposed changes?

There will be dual impact on business due this proposed change:

1. ITC on CSR expenses is blocked: as they are inserting the clause (fa) in Section 17(5), now it is not possible for us to avail the ITC because there is designated expressive clause to deal with the CSR

2. may ask for the reversal of availed credit for previous periods: This may depend on how they are going to insert the above clause either it can be prospective or retrospective.

If they are silent we have to assume it is prospective as per judgments of honourable Supreme Court of India.

5. Any other possible way can be taken by the registered person against department demand for the reversal?

Yes, Registered person may bring to the notice of department that, as there is no restriction in law to deny the availment, so only in budget they are inserting the new clause, instead of explanation to the existing clause.

So we can say that there is no restriction in GST law to take the ITC up to the insertion of 17(5) (fa). And department can’t ask the reversal on arbitrary manner.

Hope, the above content gives you some insights while making the valuable business decisions (or) giving suggestions.

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Above content is only the views & opinion of authors about referred subject. You can reach me at Cavenkat1997@gmail.com or 8792082575.