Recently in a advance ruling by Kerala authority for advance ruling , it has been held that applicant cannot take input tax credit for expense incurred in connection with corporate social responsibility expenses.
Summary of Ruling is as:
The applicant Polycab Wires Private Limited., is a dealer of electrical goods and cables. The applicant is under advance ruling for two issues.
1. Applicant supplied electrical items to Kerala state electricity board (board) through their distributors in connection with reinstating connectivity in the flood ridden areas as part of CSR activity. Distributors of applicant raised invoice on Board and charged GST. 100% discount is provided to board. However the GST liability was paid to the Government. Further distributors claimed complete amount from applicant. The applicant claimed that Since GST liability is paid, distributors are are entitled to claim input tax credit against same. The AAR allowed input credit as GST is paid on free supplies.
2. In addition to above, The applicant also distributed electrical items like, switches, fan, cables etc. to flood affected people under CSR expenses on free basis without collecting any money. As per section 17(5)(h), 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, in relation to 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.
AAR rulings are applicable only for applicants still these rulings have persuasive impacts. This ruling will impact numerous companies.
This ruling is a blow to companies who are honestly fulfilling the obligation cast on them by one regulator still based on this ruling they cannot take credit of such CSR expenses thus an additional burden on companies.
Let us first understand the provisions related to CSR.
Background of CSR Expenses – As per Companies Act, 2013, Companies are mandatorily required to incur expenses subject to some conditions, in respect of corporate social responsibility vide section 135 of the Companies Act, 2013 (only companies who fulfill specific conditions are liable to incur CSR expenses mandatorily).
Can companies still argue for ITC claim related to such CSR expenses.
We want to highlight 2 points in favor of ITC claim of CSR expenses and one recently passed case law of Cenvat credit.
First, the credit has been denied as per section 17(5)(h) of CGST act and KSGST act. As per section 17(5)(h), 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.
CSR expenses cannot be said to be goods lost, stolen, destroyed, written off or goods disposed off through free samples. Further CSR expenses are not expenses in nature of gifts.
These are expenses which are actually incurred to meet the obligation cast on the company through a regulation .i.e. through the provisions of Companies act, 2013. Companies on whom CSR provisions are applicable, are mandatorily need to comply with same.
Thus one view is that such expenses are actually statutory in nature and Section 17(5)(h) is not dealing with ITC related to statutory expenses. CSR, being statutory expenses, it can be argued that these are expenses incurred in connection with course or furtherance of applicant’s business. Thus ITC should be allowed on them.
Secondly, Companies can also draw analogy from section 17(5)(b) wherein input tax credit has been allowed by CGST Amendment act, 2018 on expenses like food and beverages, health services, renting or hiring of motor vehicles, vessels and aircraft, travel benefits to employees etc., where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.
Thus through 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.
In same way, CSR expenses are also obligatory in nature and thus credit of such expenses should be allowed by government.
Thirdly, In a recent case law Essel Propack Ltd. 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
The Tribunal held that if CSR can be considered as input service and be included within the definition of “activities relating to business” and if in so doing, a company’s image before corporate world is enhanced so as to increase its credit rating as found from the handbook of CSR activities discussed above. The answer is in the affirmative since to win the confidence of the stake holders and shareholders including the people affected by the supply of raw material from their locality say natural resources like mines and minerals etc. the hazardous emission that may result in production activities.
The Tribunal allowed the appeal.
The case law referred above pertains to period wherein CSR was not a mandatory activity but a voluntarily activity carried out by company.
This case law also provides arguments wherein companies who undertake such CSR activities can argue for claim of ITC by using arguments presented in this case law.
In view of the above discussion, Government should come out with a clarification regarding explicitly allowing ITC on CSR expenses. Disallowance of ITC on such expenses is not in line with government’s objective of seamless credit and also it will put additional burden on companies.
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