GST

Applicability of GST on supplies under CSR

In furtherance of the efforts to combat the pandemic, the corporate sector deployed their Corporate Social Responsibility (CSR) funds to make available medicines, stretchers, medical supplies etc. Though these contributions were made from the CSR funds, the confusion has been lurking over the applicability of GST on supplies under CSR activities. Whether the companies can claim ITC on the supplies made under CSR activities or not?

What are Corporate Social Responsibility activities?

Corporate Social Responsibility (CSR) are the voluntary contribution made by companies falling under a certain category in the form of projects and programmes with the aim of making a better society and providing a cleaner environment to the public. As the name suggests, the corporates have a responsibility towards the society for sharing profits earned from the society with the society itself in the form of projects and programmes for making a society a better place.  

Legal framework of CSR activities

Section 135 of the Companies Act, 2013 provides that every eligible company has to spend the average of the net profits for the preceding three financial years towards the CSR initiatives. Sub-section (1) of section 135 of the Companies Act provides the criteria for those companies who are having:

• Net worth having 500 crores or more
• Turnover of 1000 crore or more
• Net profit of 5 crore or more

in the preceding financial year to meet the CSR requirements under the Act.

Following is list of activities in which these funds can be deployed by the eligible companies under CSR initiatives:

• Promoting gender equality
• Providing education
• Contribution to PM Cares Fund
• Projects related to Rural Development
• Events related to disaster management including relief activities
• Contribution made towards protection of environment
• Promotion healthcare, preventive healthcare and sanitation activities related to Covid

Applicability of GST on supplies under CSR activities

One view: No Input Tax Credit available on supplies under GST

Before examining availability of Input Tax Credit (ITC) on CSR activities, let us first understand the meaning of some of the important definitions under GST:

1. Supply: Supply is a taxable event under GST. The liability to pay tax under GST arises at the time of supply of goods and services. Supply includes: Sale, Transfer, Barter, Exchange, Lease, Rental, Disposal and License. Anyone who is engaged in any of the abovementioned events is considered an event of supply of goods or services or both which are subject to tax under GST.
2. Goods:  All kinds of movable properties are called goods. It also includes actionable claims, grass, growing and things attached to or forming part of land. It does not include money and securities within its ambit.
3. Services: Services include every activity other than goods, securities and money. All the activities related to use of or conversion of money from one form to another is also included within the ambit of services.
4. Business: any activity which is carried by a person including activities related to trade, commerce, profession, manufacture, vocation, adventure or wager whether  or not it carried for the purpose of monetary benefit. 

Having looked at the ITC provisions under section 17(2) of Central Goods and Services Act, it can be seen that taxes are paid on the inputs that can be claimed as ITC only of the outputs are taxable supplies. Further, section 17(5) ITC is not made available for goods that have been stolen, lost, written off, disposed of by way of gifts or free samples, destroyed.

In the case of CSR activities, a company is providing output services free of cost and not for monetary benefit. Having taking into consideration the definitions of taxable suppliesand the provision of section 17(2), it can be concluded that input tax credit cannot be availed on CSR activities.

Further, the provision of section 37 of the Income Tax Act clearly explains that any expenditure which is incurred with regards to the CSR activities cannot be deemed by the assessee for profession or business. Thus, such expenditure cannot be claimed as business expenditure. This leads to a possible conclusion that since the transaction cannot be claimed as business expenditure, therefore, ITC cannot be claimed on such spending.

AAR on:  No Input Tax Credit available on supplies under GST

In the case of Polycab Wires Pvt. Ltd., the company had distributed electrical goods to the people who were affected by flood in Kerala as part of its CSR activities. The Kerala bench of Authority of Advanced Ruling held that the company had distributed the electrical appliances free of cost as part of CSR activity and therefore ITC cannot be claimed for his purpose under section 17(5) of the Kerala State Goods and Services Act and CGST Act. Here, the provision of section 17(5) was invoked to deny ITC on goods distributed under the obligations of the CSR activities.

The Gujarat Bench of Authority of Advanced Rulings (AAR) also held that CSR activities under Companies (CSR Policy) Rules have been excluded from the normal course of business. This ruling came from the authority where the applicant is a private limited company. The AAR said the private Company is not eligible to claim ITC in GST on supplies under CSR. 

The company involved in the above ruling was a supplier of insecticides, pesticide and fungicides. This company expended its CSR expenditure in providing course material and stationery for schools, providing tables and chairs in hospitals and schools, building concrete benches in public parks, installing oxygen concentrators at hospitals, distributing masks, sanitizers and oxygen concentrators.

The company submitted before the bench that since the CSR are mandatory, the expenses made by the company is made in furtherance of fulfilling that mandate and in the course of business. Therefore, expenses made on such supply should be made eligible for claiming ITC.

The Gujarat AAR did not agree to the submissions made by the company and took an opposite view. The Gujarat AAR went ahead and pointed out the fact that it is not bound by the ruling given by UP bench of AAR. It further added that AAR rulings are binding only on the applicant and the relevant GST official.  

If this ruling is accepted and followed by the GST authorities at the time of assessment, then it will become a big problem for the India Inc. which had in the backdrop of pandemic heavily spent on CSR activities such as providing medicines, oxygen concentrators, sanitizers, ventilators etc. 

Another view: Input Tax Credit is available on supplies under GST

There is another view which allows applicability of GST on supplies under CSR activities since these expenses are incurred in furtherance or in course of the business. Undertaking CSR activities have been made compulsory under the provisions of the Companies Act, 2013 and it also has a positive impact on the image of a company. It creates a goodwill and enhances the reputation of a company. Therefore, it can be concluded that CSR activities are incurred in furtherance or course of business and hence ITC can be claimed by virtue of this.

 AAR on:  Input Tax Credit is available on supplies under GST

In the case of Essel Propack Limited v Comm. Of CGST- Mumbai CESTAT held that ITC can be claimed for all the expenditure which is incurred on the CSR activities. The Tribunal was of the opinion that CSR activities improved the image of the company and thus they can be considered as activities relating to the business.

A divergent view was taken regarding GST on supplies under CSR by two different benches of the same AAR. The Uttar Pradesh bench came out with an advanced ruling in the case of Dwarikesh Sugar Industries. The bench held in this ruling that CSR expenditure is done by the company just for the purpose complying with the obligations imposed by the Companies Act, 2013. Therefore, the GST on the supplies under CSR incurred by the company on the products which it purchased in furtherance of its CSR expenditure can be set off against its GST liability.

Confusion over calculation of CSR contribution

The Companies Act, 2013 does not provide any clarity whether the contribution towards GST have to be made inclusive or exclusive of taxes. It is pretty much clear that GST is charged on supply of goods and services regardless of the intention behind such supply or the social benefit to be achieved from such supply so the CSR contribution can be both inclusive and exclusive of GST. The confusion still persist on the inclusivity of the amount of GST paid in furtherance of CSR expenditure for the purpose of Section 135(5) of the Companies Act, 2013.  

Availing Benefit through beneficiary 

Usually a company contributes an amount towards a beneficial organisation such as Section 8 companies, charitable trusts, Non-Government Organisation (NGOs) [“implementing agencies”] for the purpose of fulfilment of CSR activities. However, in order to run their day to day operations and also in the fulfilment of their objectives, they need to hire certain services of vendors to complete these activities. Then these vendors charge GST for the services rendered by them to these implementing agencies. Since, these implementing agencies do not generate output by themselves, the question then pops up whether these implementing agencies can claim ITC for the services rendered by them.

Rule 33 of the Central Goods and Services Tax (CGST) Rules, 2017^[1] provides the concept of ‘pure agent’. Pure agent has been defined under the rules as one who while making a supply to a recipient also receives and incurs expenditure on some other supply on behalf of the recipient and claims reimbursement (as actual, without adding to it the value of his own supply) for such supplies from the recipient of the main supply.  

The implementing agencies by their way of functioning fulfil the eligibility criteria of pure agent. Rule 33 also provides some conditions on fulfilment of which the expenses incurred by the supplier as a pure agent of the recipient of the supplier of goods and services are excluded from the value of supply –

1. Where the supplier acts as a pure agent to the supply
2. Where payment on behalf of recipient of supply has been separately indicated in the invoice
3. These services are actually in addition to the services supplied from his own account

In the given situation, if an implementing agency avails any goods or services from a vendor to fulfil the CSR obligations for a company, then the payment made to any such implementing agency shall be construed as a supply made as a pure agent made by the implementing agency on behalf of the recipient of supply i.e. the other company. Therefore, these expenses made by the implementing agencies are excluded from the value of the supply and hence not liable for payment of GST.  

Conclusion

In order to bring an end to this confusion and divergent views being taken by different AAR benches, it is necessary that the government comes out a clarification on GST on supplies under CSR allowing ITC on CSR initiatives. If these companies are not allowed to claim ITC on their CSR initiatives, then it will pose a big burden on them. Another question to be resolved is the calculation of the amount of CSR expenditure with respect to the inclusivity or exclusivity of GST imposed on it.  

Read our Article:Problems in availing of ITC under GST