As the world is reeling under the impact of Covid-19, most donations made in India would qualify as a Corporate Social Responsibility (CSR) activity. These donations may be in the form of cash or in-kind such as PPE kits, sanitizers, etc. This article aims at analyzing the impact of GST on CSR activities/expenditure.
What is CSR?
CSR is a corporate entity’s way of giving back to the society from which it draws all its resources, personnel, and business for the betterment of its stakeholders and society we live in. At the corporate level, CSR is generally considered as a strategic initiative that contributes to the organization’s brand and positive impact. Section 135 of the Companies Act, 2013, mandates companies satisfying either of the following 3 conditions during any financial year to spend at least 2% of the average net profit of the company made during the three immediately preceding financial years towards CSR activities:
Donation in kind
Section 16 of the CGST Act enables a registered person to take credit of input tax charged on supply of goods or services to him, if the said goods or services are used or intended to be used in the course or furtherance of business, along with certain conditions.
It is imperative to understand whether the activities performed for CSR are in the course or for the furtherance of business as it is one of the main conditions to avail input tax credit.
The term “business” is defined under section 2(17) of the CGST Act, to include:
CSR activities are said to be carried out mandatorily for the above-mentioned specific class of companies under Companies Act, 2013, they are required for conducting the business in compliance with the law. Hence it can be said that they are incidental to the main business activities. Therefore, they can be considered to be in the course of or for the furtherance of business.
In the case of Essel Propack Ltd vs Commissioner of CGST, Bhiwandi 2018-TIOL-3257-CESTAT-MUM, it was held that CSR can be considered as input service since they are included within the definition of “activities relating to business” and that these activities could be differentiated from charitable activities. This analogy is more true/apt in GST on the eligibility of ITC on CSR activities as the same has much wider implications in comparison with CENVAT credit provisions.
However, the aspect that needs to be examined is section 17(5) of the CGST Act, which discusses blocked credit. Section 17(5) (h) disallows ITC on goods that are lost, stolen, destroyed, written off, or disposed off by way of gift or free samples.
The phrase that is required to be analyzed here is “disposed-off by way of gift”. CSR activity cannot be categorized as a gift, as the Companies Act, 2013 mandates certain expenditures to be incurred. Hence it is obligatory in nature, (this may not hold good for entities other than companies) whereas, gifts are not obligatory in nature.
Therefore, it can be said that section 17(5)(h) of the CGST Act, would not be applicable to the expenditure incurred on CSR activities. Unless and until the same is specifically covered in Section 17(5) of the CGST Act.
However, in the case of M/s Polycab Wires Pvt ltd 2019-TIOL-107-AAR-GST, a different view has been taken, where the AAR held that ITC would not be available on such activities u/s 17(5)(h), as they are provided free of cost.
It is also important to understand the treatment of expenditure on CSR activities under the Income Tax Act. Section 37 of the Income Tax Act, specifically disallows the deduction of any expenditure incurred on such activities for the purpose of computing the taxable profit as per the Act. However, most of the expenses incurred for CSR activities would qualify as a deduction under section 80G or under sections 30 to 36 of the Income Tax Act.
Unlike in Income Tax Act, there is no specific restriction under the GST law which provides for the exclusion from the word business under Section 2 (17) & which blocks the availment of ITC under Section 17(5) on such inward supply of goods or services.
A transaction should fall in the “scope of supply” as provided for in section 7 of the CGST Act to attract GST. As per the said section “supply” includes:
Since it is clear that there is no consideration received from CSR activities performed by the registered person, it is important to examine Schedule I of the CGST Act, which mentions the activities that would be treated as supply even if made without a consideration.
Entry No. 1 of Schedule I of the CGST Act, would be relevant in the current scenario, i.e. “Permanent transfer or disposal of business assets where input tax credit has been availed on such assets”.
Firstly, since the registered person’s own products (manufactured or traded) are being distributed free of cost for CSR activities, these would be “finished goods” in the business of the registered person, hence they can be called as business assets.
Secondly, the input tax credit should have been taken on these assets. As discussed earlier, input tax on CSR activities can be taken as a credit, hence any input tax incurred on procurement/manufacture of the output goods, which are distributed for CSR purposes can be availed as a credit.
Hence, if the registered person has availed ITC on the said goods (business assets), the permanent transfer of these goods would amount to supply, though it is given without any consideration/ free of cost, thereby attracting GST.
As discussed above, Schedule I of the CGST Act is required to be analyzed to decide whether the provision of service qualifying as a CSR activity would be a supply attracting GST.
It is to be noted that entry No. 1 “Permanent transfer or disposal of business assets” would not be applicable in case of services, as it particularly covers goods(business assets) but not services.
The next entry, i.e. entry No. 2 “Supply of goods or services between related persons or between distinct persons” would also not be applicable, as the services provided under CSR must not be towards any related persons or distinct persons.
Hence any services provided by a company without any consideration for CSR activities would not be a supply, thereby not attracting GST. On the contrary, CSR activities done through outside agencies to undertake specific projects for consideration may get covered under the scope of supply and would be liable for GST. However, if the said service is specifically exempt under notification No. 12/2017- Central Tax (Rate), then there would be no GST payable.
Since there is no specific provision that denies input tax credit on CSR activities, a stand can be taken to avail the input tax credit. However, the shortfall in CSR expenditure arising due to availment of ITC should be compensated by contributing additionally towards CSR activities, so that the minimum contribution requirement (i.e. 2% of average net profits) is satisfied. Professional guidance can be sought in this regard, before taking a stand, as it may be litigated by the department.
In these times of crisis, it is imperative that all those who are contributing to the well- being of others, be encouraged and motivated to keep doing the same. Hence, the government should allow businesses to avail the input tax credit on CSR activities without any litigation would be received with high appreciation by the trade and industry.