Sec 135 of the Companies Act prescribes certain criteria for mandatory CSR expenditure. If company fulfils any of the prescribed criteria, then it needs to constitute a CSR committee of Board which shall formulate and recommend CSR policy to spend at least 2% of the average net profit of the immediately preceding 3 FYs.

Usually, Companies incur expenditure on CSR either in form of ‘donations (goods)’ or taking up ‘public welfare projects’ like construction, re-construction, renovation, addition to road, hospital, schools (services) etc. This expenditure may have levy of GST. In this article, we will discuss the eligibility of input tax credit of GST paid on such expenditure.

Closeup businessman place a wood alphabets on the desk as the abbreviation of CSR

ITC eligibility – Sec 16 of the CGST Act, 2017:

GST law does not provide any specific provision relating to eligibility of input tax credit on CSR expenses. As per Section 16, the registered person is entitled to claim input tax credit on all goods or services or both which are used in the course or furtherance of business. This is further subject to satisfaction of other prescribed conditions and restrictions given u/s 17(5).

Blocked Credit – Sec 17(5) of the CGST Act, 2017:

Input tax credit shall not be available in respect of the following:

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable

Explanation – the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples

Hence, in order to claim ITC of GST paid on CSR expenses, we need to check two aspects. First is whether the expenses is in the course or furtherance of business? and second is whether it is blocked u/s 17(5)?

CSR Expenses – Whether can be considered as ‘In the course or furtherance of business’?

The term ‘business’ is defined under the CGST Act to include any trade, commerce, manufacture, profession whether or not for pecuniary benefit. It also includes any activity or transaction in connection or incidental or ancillary to such activities.

CSR expenses are mandated by Section 135 of the Companies Act as stated above. Failure to incur these expenses could result in punitive actions and leads to disclosure of non-compliance in board report which could be a public document leading to tarnish the image of a company and lower the brand value. Thus, CSR expenses are well needed to run business smoothly in compliance with applicable law. CSR has a nexus with business and should be considered as business expense.

Recently, in case of Essel Propack Ltd. v/s Comm. Of CGST, Bhiwandi (2018 (9) TMI 247), Tribunal made a finding that “If by undertaking CSR activities, a company’s image before corporate world is enhanced, the same would be covered under business activities. Since CSR was a mandatory requirement for the public sector undertakings, it has been made obligatory for the private sector as well, unless the same is to be treated as input service in respect of activities relating to business, the production and sustainability of the company itself would be at stake. Hence, cenvat credit was allowed.

What if expenses are beyond the mandatory limit???

There could be companies who may undertake CSR activity on voluntary basis or incur expenses over and above the mandatory limit. Minimum expense limit is mandated under Companies Act, however no limit is prescribed for the maximum amount to be incurred for CSR activities. Even non-mandatory CSR expenses can help business in creation of goodwill and brand value. Thus, mandatory requirement under the Companies Act should not only be the yardstick to judge whether or not expenses on CSR is in the course or furtherance to business. CSR expenses over and above mandatory limit should also be considered as business expenses.

First criteria is satisfied that CSR expenses are business expenses.

Let us now analyse the second criteria.

  • In case of donations (Goods):

Section 17(5)(h) restricts the ITC on goods which are disposed of by way of gift. The term gift has not been defined under the GST Act. A reference to other laws as well as dictionary meaning suggests that gift means something which is given voluntarily to the recipient. It is given out of generosity and not mandatory.

  • Mandatory CSR expenditure is not a gift since it is done under an obligation laid down by the Companies Act. Hence, input tax credit in this case shall be eligible.
  • Voluntary (over and above the mandatory limit) CSR expenses may qualify as gift since it is not done under an obligation. It is given voluntarily. Hence, input tax credit in this case shall not be eligible.

Important to note that this restriction is not applicable to services. Thus, input tax credit on services [subject to section 17(5)] used in voluntary CSR expenses shall be available.

  • In case of construction, re-construction, renovation etc. (works contract services):

Section 17(5)(c) and 17(5)(d) of the CGST Act restricts input tax credit in respect of works contract services or goods or services or both received for construction of an immovable property. Explanation to these clauses provides that the construction shall include in its scope, re-construction, renovation, addition or alteration or repairs to the extent of capitalization to the said immovable property.

Expenses incurred for re-constructing, renovation, addition, alteration of an immovable property under CSR initiative is not capitalized in the books of account of business entity. In this situation, the provisions of section 17(5)(c) and 17(5)(d) fail to attract. Thus, input tax credit on CSR expenses incurred by way of works contract services relating to an immovable property which is not capitalized, shall be admissible.

  • Summary:
Expenses in nature of Expenses within mandatory limit?

ITC eligibility?

Goods Yes Yes
No No
Services [not covered in 17(5)] Yes/ No Yes
Services [covered in 17(5)] Yes/ No Yes,

if expenses are not capitalized

Author Bio

Qualification: CA in Job / Business
Company: Larsen & Toubro Limited
Location: Mumbai, Maharashtra, India
Member Since: 03 Jun 2019 | Total Posts: 1

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September 2021