Input Tax Credit (‘ITC’) on Corporate Social Responsibility (‘CSR’) expenses

A) Background of CSR expenses:

  • In terms of section 135 of the Companies Act, 2013, every company with a specified networth or with a specified turnover, or with a specified net profit is obliged to incur a minimum of 2 % of their average net profit of immediately preceding 3 financial years towards their corporate social responsibility and failure to do so attracts penalty under the provisions of the Companies Act, 2013.
  • CSR expenses could be incurred by the companies for infrastructure development, healthcare, education, social causes which aid’s the betterment of society, etc. Companies undertaking CSR projects would be requiring various inward supplies of goods or services in order to complete the same. These inward supplies could have GST levied on it. Therefore, an important question that arises in this context is “whether GST paid on such CSR expenses are eligible for the Input tax credit under GST?”

B) Analysis of provisions of The Income Tax Act, 1961 (referred as ‘Income Tax Act’) and The Goods and Services Act, 2017 (referred as ‘GST Act’)

  1. Income Tax Act:
  • It is pertinent to note that deduction for CSR expenditure is not allowed under Income Tax Act, 1961.
  • As per explanation 2 to sec 37 of the Income Tax Act 1961, “any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession”.
  • Central Board of Direct Taxes (‘CBDT’) has clarified that – “CSR expenditure, being an application of income is not incurred wholly and exclusively for the purpose of carrying on a business. If such expenses are allowed as a tax deduction, this would result in subsidizing of around one-third of such expenses by Government by way of tax expenditure.”
  • On a perusal of the above, by way of deeming fiction, deduction of CSR expenses is not allowed under Income Tax Act deeming it not to be for business or profession.
  1. GST Act:
  • Section 16(1) of the Central Goods and Service Tax (‘CGST Act, 2017’) prescribes the eligibility criteria for taking ITC. It states that “Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”
  • The term business is defined under the CGST Act, 2017 and the relevant extract of the same is reproduced “Business includes (a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit; (b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a); ………”
  • However, the phrase “in course or furtherance of business” has not been defined in the GST Act. Dictionary meaning of the term “furtherance” implies advancement of scheme or interest. Accordingly, any activity carried on with a purpose to achieve business objectives as well as business continuity could amount to an activity in course or furtherance of business.
  • As discussed above, CSR expenses are mandated in terms of section 135 of the Companies Act and failure to incur these expenses could result in penal actions which impacts the brand value of the company. Thus, CSR expenses are incurred to run the business smoothly and in compliance with the applicable law.
  • In light of above, one may contend that CSR expense has a nexus with business and should be considered as business expense.
  • It is also pertinent to note that, unlike Income Tax Act, there is no deeming fiction created/ no specific provision in GST Act stating that CSR expenditure incurred by the taxpayers should be considered as ‘not for business purpose expense’

C) Eligibility of ITC on CSR expenses in GST:

  • As mentioned above, apart from the requirement of sec 16(1) of the CGST Act 2017, eligibility of ITC is further subject to satisfaction of other prescribed conditions and restrictions given u/s 17(5).
  • Hence, in order to claim ITC of GST paid on inward supplies relating to CSR, following two key aspects should be evaluated:
  • Whether the expenses incurred are ‘in the course or furtherance of business’?
  • Whether it is blocked u/s 17(5) of the CGST Act 2017?
  • 1st criteria is generally fulfilled in case of expenses incurred for CSR (i.e. CSR expenses would qualify as expense incurred ‘in the course or furtherance of business’ as discussed above.
  • We have evaluated the 2nd criteria hereunder:
  • The relevant provisions of sec 17(5) have been produced hereunder:

“Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely;-

(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 property.

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.”

  • There could be instance whereby company may incur CSR expense voluntarily which could be over and above the expense mandated in terms of the provisions of the Companies Act, 2013. Accordingly, in case of excess voluntary CSR expenditure on the procurement of services, one may argue that such expenses help the business to create goodwill and brand value. Thus, a mandatory requirement under the Companies Act should not only be the only parameter to judge whether or not expenses on CSR is in the course or furtherance to business. CSR expenses over and above the mandatory limit should also be considered as business expenses (in case of procurement of services.)
  • However, in case of procurement of goods for CSR expenditure which are over and above the mandatory limit, ITC restriction in terms of section 17(5)(h) should be analysed. 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. However, in common parlance, gift is provided to someone occasionally, without consideration, and is voluntary in nature. Further, gift is a gratuity and an act of generosity. There is no mandatory requirement/ obligation on the provider to provide such gift. Mandatory CSR expenditure is not a gift since it is done under an obligation laid down by the Companies Act. Hence, ITC in such a scenario shall be eligible.
  • In case of procurement of goods, 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, ITC in such a scenario shall not be eligible. Important to note that this restriction is not applicable to services. Thus, ITC on services [subject to section 17(5)] used in voluntary CSR expenses shall be available.
  • In our view, the companies undertaking CSR projects can only have the query on ITC availment of goods and services used to incur CSR expense and no query on ITC pertaining to capital goods. This is because CSR expenses are never capitalised in books of accounts. Instead, the same are debited to the Profit or Loss account in financials. Accordingly, restriction on ITC availment as mentioned in section 17 (5) (c) and section 17 (5) (d) would never apply in the case of CSR expenses since these ITC restrictions are triggered only in case of capitalisation of such expenses.