The question of whether Input Tax Credit (ITC) can be claimed on Corporate Social Responsibility (CSR) expenditure under the Goods and Services Tax (GST) regime has been a longstanding debate. The debate gains significance because of the mandatory nature of CSR activities as stipulated in Section 135 of the Companies Act.
1. Input Tax Credit (ITC) on Corporate Social Responsibilities (CSR) expenditure is a longstanding debate from the erstwhile regime.
1.1 Corporate Social Responsibility (CSR) activity means an activity undertaken by a company in pursuance of its statutory obligation laid down in Sec 135 of the Companies Act.
1.2 In terms of Section 135 (5) of the Companies Act, it is mandatory for a Company to spend in every financial year a specified amount towards CSR. There are penal clauses for failing to fulfill the obligation.
2. There are two schools of thought, one which is in favor of allowing the expenses as eligible ITC and the second, considering it as ineligible credit.
2.1 Advance Rulings: In the GST regime, the taxpayers have sought clarity through advance rulings to establish a definite tax position. However, there were divergent views emerged by AAR (Advance Ruling Authority) in different cases.
2.2 The AAR-UP in the case of Dwarikesh Sugar held that ITC on CSR expenses is allowable and the same AAR in the case of SHRIRAM PISTONS AND RINGS LIMITED, held that ITC on CSR expenses is not allowed.
2.3 The Kerala Advance Ruling Authority (AAR), in the case of Polycab Wires (P.) Ltd., In re 2 had earlier disallowed ITC on CSR activities treating same as a gift.
2.4 Gujarat AAR, in the case of Adama India (P.) Ltd., In re 3 held that CSR activities are in pursuance of statutory obligation and not in the normal course of business, hence considered the respective ITC to be ineligible
3. Amendment: A new clause (fa) is inserted after section 17(5)(f) of the CGST Act vide Finance Act 2023 amendment
3.1 Section 17(5) of the GST Act specified the list of items for which ITC (Input Tax Credit) is Blocked or ineligible.
3.2 Statutory Provision: As per Section 17(5) (fa)of CGST Act, ITC is Blocked for goods or services or both received by a taxable person, which is used or intended to be used for activities relating to his obligations under Corporate Social Responsibility referred to in section 135 of the Companies Act, 2013.
4. Effective date of amendment: CBDT vides notification No. 28/2023 dated 31.07. 2023 specified that the amendment proposed in Finance Act 2023 for insertion of clause (fa) in Section 17(5) of CGST Act shall come into force w.e.f. 01 October 2023.
5. The question is whether the ITC on CSR expenses would be allowed before the date of notification by which clause (fa) has been inserted and whether ITC on CSR is specifically blocked under section 17(5) (fa) of the CGST Act.
6. Expert’s opinion: The experts are of the view that clause (fa) to section 17(5) of the CGST Act has been inserted specifically to block ITC on CSR expenditure. It does lead to the conclusion that earlier such ITC was not blocked and Input Tax Credit can be availed for CSR expenditure incurred before the notification date i.e., 01.10.2023.
7. Unanswered Issues: Since the amendment in law is prospective, the following issue remains unanswered:
(a) Whether the companies can take credit for procurements made until this new provision is notified?
(b) Whether ITC on CSR already reversed by taxpayers either voluntarily or under the instruction of the department can be re-availed?
(c) Whether the taxpayers who had not availed the ITC on CSR activities can re-avail the same keeping in mind the timelines prescribed under section 16?
Conclusion: It is high time that the government should bring clarity on the open point related to eligibility in past periods and settle the dust once and for all. A comprehensive circular addressing all these aspects is awaited to avoid unnecessary litigation on this issue.
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