Can we claim the Input Tax Credit (ITC) on expenditure related to Corporate Social Responsibility (CSR) Activities?

Background:-

Provisions under Section 16of the Central Goods and Services Tax (CGST) Act, 2017 relating to “Eligibility and Conditions for taking Input Tax Credit (ITC)”, are as under:

(1) 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.

Opinion:

  • According to Sec 2(17) of CGST Act, 2017, “Business” can either be a core or an ancillary activity whether or not involving monetary benefits. Thus, CSR Activities come under the purview of Business.
  • The literal meaning of the said phrase ‘in the course of or furtherance of’ means that ‘during the act of or in continuation of carrying out such activities in future’.
  • CSR Activities are said to be carried out mandatorily as per Sec 135 of The Companies Act, 2013.
  • The furtherance would be affected if the “Law of the Land” is not followed when it is to be followed. This argument may however not hold good in case of entities other than companies.
  • So, it can be said that non-compliance of CSR would lead to violation of the statutory provisions which in-turn affects the business activities.
  • So, it can be understood that ITC can be availed on expenditure made for CSR Activities as it is in the course or furtherance of business.
  • Through the CGST Amendment Act, 2018 credit should not be denied for those expenses incurred by employers in connection with statutory obligations imposed. The motto of GST law is also allowing seamless credit.

Reference to the conflicting case laws:-

  • In a recent case law Essel Propack Vs Commissioner of CGST, Bhiwandi (CESTAT Mumbai) dated August 31, 2018, the Mumbai CESTAT held that the input service credit in respect of expenditure on CSR can be availed by the Company which discharges CSR obligations.
  • Recently in an advance ruling by Kerala authority for advance ruling (Applicant: – PolycabWires Private Limited.), it has been held that applicant cannot take the input tax credit for the expense incurred in connection with corporate social responsibility expenses. The applicant also distributed electrical items like switches, fan, cables etc. to flood-affected people under CSR expenses on a free basis without collecting any money. As per section 17(5)(h), the input tax credit shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Thus, concerning this, the applicant was denied input tax credit on such free goods distributed as per section 17(5) of CGST and KSGST by Kerala AAR.

Point of Confusion:

  • If it is a business-related expenditure, why can’t it be allowed under the Income Tax Act, 1961?

The conclusion to the Confusion:

  • Section 37 of the Income Tax Act, 1961 is a residuary section which allows deduction of business expenditures not covered specifically under sections 30 to 36. Since the admissibility of CSR expenditure as business expenditure under section 37 was not clear due to differing Court rulings, the Budget proposals were expected to clarify the same, which it did in the year ______, however not in the interest of the corporate sector.
  • To clarify, the Finance (No.2) Act, 2014 has inserted an Explanation to section 37 which is reproduced as under:

“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 shall not be deemed to be an expenditure incurred by the assessee for the business or profession.” 

But as per the Companies (Corporate Social Responsibility Policy) Rules, 2014 it has been clarified in rule 4(1)that CSR spends excludes “activities undertaken in pursuance of the normal course of business of the company”

NO CHANGE PROPOSED IN MAT PROVISIONS – A BLESSING IN DISGUISE

  • The statement of Profit and Loss as per Schedule III to the Companies Act, 2013 does not consider CSR expenditure as an appropriation of profits and, thus, allows it as a business expenditure while computing profits. This profit as per Companies Act, 2013 forms basis of MAT provisions under section 115JB of the Income-tax Act, 1961. Since there is no budget proposal to add back this CSR expenditure for computation of MAT under section 115JB of the Income-tax Act, 1961, the same has come to the advantage of the corporates. Since such expenditure is 2% of the profits, the corporates falling under the MAT regime are expected to make huge tax savings on this ground. This inconsistency between two laws, no doubt, will be located and plugged in soon.

CONCLUSION

Considering the prevailing economic scenario, one can be sure that in no case a corporate will incur expenditure on CSR activities for which it is not able to claim tax benefit. But the larger question that arises is: Whether the whole purpose of mandating CSR activities is lost, since a majority of corporates may opt for contributing to Prime Minister’s National Relief fund and thereby, relieve themselves of their further accountability to ensure proper utilization of funds towards CSR activities. While the concerns of both, the Government and the corporate assessees, are appreciable, it is felt that something more needs to be done. Even though allowing this expenditure as business expenditure is not the solution, not providing benefit to the person sharing the responsibility is also not right. There is a need to provide more options in the Income-tax Act, 1961 so that the corporates are incentivized to invest directly in CSR activities 

Reference to the conflicting case laws:-

  • If we see the case laws of past years it shows ambiguity, for example in the case of CIT Vs Infosys Technologies Ltd (2014) (360 ITR 714)the Karnataka high court allowed the expenditure incurred for installing traffic signal by the company under the social initiative. The court said the traffic signal used by its employee so it relates to business activity hence allowed u/s 37(1)
  • But in the case of CIT Vs. Wipro Ltd (360 ITR 658)(kar) expenditure for community development near its factory, the court does not find any nexus for its business activity hence disallowed such expenditure u/s 37(1).

Summing up:

  • Facts of each case/transaction will need to be analyzed taking into consideration relevant provisions of GST law, before taking a call on claiming the benefit of ITC qua such transactions. Unless specifically clarified by the Department, there could be an exposure to litigation if credit is availed in such cases where output is not subject to GST. ITC becoming a cost to the company due to its inadmissibility might lead to curtailment of benefit to the society at large unless the company prefers taking an additional hit on its profits.
  • It is time that the govt. brings in the benevolent amendment to ensure that ITC is allowed for CSR. This will encourage the industry to come forward for taking up similar projects of CSR which otherwise requires govt. support.

Author Bio

Qualification: Student - CA/CS/CMA
Company: Rao and Kumar Chartered Accountants
Location: VISAKHAPATNAM, Andhra Pradesh, IN
Member Since: 13 Mar 2020 | Total Posts: 5

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