CSR from Company law, Income Tax and GST perspective

CSR (Corporate Social Responsibility) from Company law, Income Tax and GST perspective

Corporate social responsibility (CSR) can be simply and broadly defined as the ethical role of the corporation in society. The aim of CSR is to increase long-term profits and shareholder trust. It’s like repaying to the society for the resources consumed and pollution caused by the organisations.

CSR from Company Law perspective:

We know that companies Act 2013 has made CSR (Corporate Social Responsibility) expenditure mandatory by insertion of section 135. A minimum 2% of average net profit before tax of last 3 years profit is mandatorily required to be spent as CSR expenditure for companies fulfilling any of the following 3 criteria:

1. Net worth => Rs 500 crore during the immediately preceding year

2. Turnover => Rs 1000 crore during the immediately preceding year

3. Net profit before tax => Rs 5 crore during the immediately preceding year

Hence in order to determine whether CSR expenditure is mandatory for a company in FY 2019-20, we need to check net worth or turnover or net profit before tax criteria based on financial statement for FY 2018-19 and if the company is fulfilling any of the 3 condition then CSR provisions (Sec 135) will be applicable for such company.

Example:

A Ltd started its operation w.e.f 01.04.2014 and the key figures from its financial statement is as below:

	Rs in Crore
Particulars	FY 14-15	FY 15-16	FY 16-17	FY 17-18	FY 18-19
Net Worth	400	540	600	400	700
Turnover	900	950	1,100	850	1,300
Profit before tax	4.00	3.00	(2.00)	3.00	8.00

Find out whether the provisions of CSR (Sec 135) apply to A Ltd for different financial year and if applicable minimum amount of CSR expenditure to be done in different financial year.

Solution:

Financial Year	Applicability of CSR provisions with reason	CSR amount (Rs in lacs)
2014-15	No- Since 1st year of operation and preceding year data not available.	Nil
2015-16	No- Since not satisfying any of the 3 criteria of net worth, turnover and profit	Nil
2016-17	Yes- since meeting any one i.e net worth criteria of => Rs 500 crores based on financial statement of FY 2015-16	7.00 [2%*{(4+3)/2}]
2017-18	Yes- since meeting minimum one (in this case 2) of the 3 criteria based on financial statement of FY 2016-17	3.33 [2%*{(4+3-2)/3}]
2018-19	No- Since not satisfying any of the 3 criteria of net worth, turnover and profit based on financial statement of FY 2017-18	Nil
2019-20	Yes- since meeting minimum one (in this case all 3) of the 3 criteria based on financial statement of FY 2018-19	6.00 [2%*{(-2+3+8)/3}]

Penalty for non-compliance of Sec 135:

Sec 134(8) of Companies Act provides that if a company contravenes the provisions of sec 134 relating to board report on CSR, then following will be the penalty:

1. Company will be punishable with minimum fine of Rs 50,000 which may extend upto Rs 25,00,000 and

2. Every officer in default will be punishable with imprisonment upto 3 years or fine of Rs 50,000-5,00,000 or both.

Apart from that sec 450 (i.e general penalty) provides that where no specific penalty is provided then the company and every officer in default will be punishable with fine upto Rs 10,000 which may further extent to Rs 1,000 per day if contravention continues.

The Companies (Amendment) Bill 2019 has proposed that any unused CSR amount for more than 3 year to be transferred to state corpus.

CSR from Income Tax perspective:

CSR expenditure has been made mandatory for applicable companies from the year 2013. Prior to the year 2013 it was optional.

Finance Act 2014 inserted explanation 2 to Sec 37 of Income Tax Act 1961, which specifically provides that CSR expenditure incurred u/s 135 of Companies Act 2013 will not be allowed as a business expenditure.

Prior to year 2013 since CSR expenditure was optional in nature so in most of the assessment the same has been allowed as business expenditure based on various court ruling.

CSR from GST perspective:

In the service tax scenario (i.e prior to GST) there was a lot of confusion with respect to admissibility of CENVAT credit paid on CSR expenditure. In cases where these expenditures where shown as related to business CENVAT was allowed and in other cases CENVAT was not allowed.

Under GST the ITC (Input Tax Credit) is basically governed by sec 16 and 17 of CGST Act 2017.

Sec 16 provides that ITC will be available if the goods or services are used or intended to be used in the course or furtherance of business.

Sec 17(5)(h) provides that ITC is not available for goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

Arguments in favour of taking ITC on CSR expenditure:

1. Since CSR expenditure is mandatory in nature so it forms part of business expenditure and hence ITC should be allowed.

2. In CSR goods are not distributed as gift or free sample rather than under statutory obligation. So sec 17(5)(h) is not applicable. Hence ITC should be allowed in full for CSR expenditure.

3. Whether certain expenses are allowed or not under Income Tax Act does not have any impact on admissibility of ITC under GST. There are many allowable expenses under Income tax Act on which ITC is not available under GST (like rent a cab, civil structure etc).

Arguments against taking ITC on CSR expenditure:

1. CSR expenditure is not in course or furtherance of business and rather it’s a statutory obligation and hence ITC will not be available.

2. CSR expenditure is not allowed as a business expenditure u/s 37 of Income tax Act. Since it’s not a business expenditure so the question of taking ITC does not arise.

3. Sec 17(5)(h) of CGST Act 2017 specifically provides that where goods are distributed by way of gift then ITC is not available.

4. In March 2019 there was a Kerala state Advanced Ruling on the CSR expenses which provided that since goods are donated as free samples/ gifts, so ITC availed should be reversed.

Conclusion:

In view of the recent Kerala state Advance Ruling the intension of the Government seems very clear of not allowing ITC on CSR expenditure. (However Advance ruling is not binding on others)

Beside if a company wants to restrict its expenditure to 2% of average profit then if the company takes ITC it will have to incur additional expenditure equivalent to the amount of ITC to meet the 2% threshold. For Example: If average profit is Rs 6 crore then company need to spent minimum 12 lacs for CSR . In case company incurred expenditure of 12 lacs (Base value 10.50 lacs + 1.50 GST) and company claims ITC (assuming allowed) then it will have to incur further expenditure before GST of Rs 1.50 lacs to meet the 2% expenditure. In case company decides not to claim ITC then it need not to spent more since GST will form part of the cost. Hence it’s a zero sum game.

Hence considering all the above points it is advisable for companies not to claim ITC on CSR expenditure as it’s not free from dispute.

(It may be noted that the above is personal opinion of the author)