GST Advantages for Businesses in terms of CSR Spending

GST advantages for businesses in terms of CSR spending

CSR (Corporate Social Responsibility) pertains to a company’s voluntary contribution to a better society and a healthier and cleaner environment in the form of initiatives or programmes. Section 135(5) of Companies Act, 2013 mandates every qualified entity (as defined in section 135(1)) to devote at least 2% of its net earnings over the previous 3 financial years to (CSR) Corporate Social Responsibilities initiatives. Contributions to the NGOs or other recipients, as well as money paid to implementing agencies, may occasionally be included in CSR spending. Nevertheless, the expenditure is frequently related to the procurement of goods or services for one or more CSR initiatives. This purchase of goods or services entails a tax expense, namely GST.

CSR Spending in Pre GST/ Post GST

The Act does not specify whether the amount to be given to CSR activities ought to be tax-inclusive or tax-exempt. Yet, because GST is imposed on the delivery of goods and services, regardless of the aim of social benefit, it appears that the amount given to CSR may be both included and exclusive of GST. With stated so, the issue of the inclusion of the amount of GST paid towards the amount of CSR spending for the purposes of section 135(5) of the Companies Act, 2013 remains.

The following are among the main expenditures addressed under CSR (Corporate Social Responsibility) activities:-

  • Educating people
  • encouraging gender equality
  • Projects pertaining to rural development
  • Donation to the PM Cares Fund
  • Making a contribution to environmental protection
  • Encouragement of COVID-19-related healthcare, preventive healthcare, and hygiene activities
  • Disaster management events, including relief efforts

Eligibility for ITC (Input Tax Credit) on CSR Spending and initiatives

Section 16 clause 1 of the Central Goods and Services Tax Act (‘CGST Act, 2017’) specifies the requirements for claiming Input Tax Credit (ITC). It specifies that:-

“Every registered individual will be entitled to take credit of input tax charged on any supply of goods or services or both to him that are used or planned to be used in the course or furtherance of his business, subject to such conditions and restrictions as may be prescribed and in the manner stated in section 49, and the said amount shall be credited to the electronic credit ledger of such person.”

CSR initiatives have a significant influence on the company’s image and are also obligatory under the Companies Act of 2013. It improves the company’s reputation and so generates goodwill for the company. Therefore, it is possible to conclude that Corporate Social Responsibility initiatives are undertaken in the course or promotion of business. As a result, ITC may be claimed for these activities.

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Cases where ITC is available on CSR Spending

Essel Propack Limited vs. Commissioner of CGST –

  • Mumbai CESTAT determined that ITC may be claimed for expenses incurred for CSR activities.
  • The Tribunal determined that CSR activities enhanced the company’s image and provided a company with long-term economic, social, and environmental sustainability in society, as a company can’t function without providing benefits to its stakeholders, and thus they can be deemed as business activities.
  • As a result, if businesses are incapable of claiming input services for business-related activities, the output and viability of the businesses themselves would be jeopardised.

In the case of M/s Dwarikesh Sugar Industries Ltd. –

  • The Uttar Pradesh Authority for Advance Ruling (AAR) ruled that a firm is obligated to engage in CSR initiatives as part of its business process.
  • As a result, CSR efforts must be considered as incurred in the “course of business.”
  • Section 135(7) of the Act is a criminal clause that deals with penalties for noncompliance with Sections 135(5) and 135(6).
  • The AAR remarked that a company meeting the qualifying criteria as per Section 135(1) of the Act is obligated to spend mandatory funds on CSR and so should comply with these regulations to maintain the smooth operation of the business.
  • Thus, the Uttar Pradesh AAR determined that the costs paid by the Company in order to comply with the Act’s CSR obligations qualified as incurred in the course of business and are entitled for ITC as per Section 16 of the CGST Act, 2017.

In the case of M/s Commissioner of Central Excise, Bangalore vs. Millipore India (P) Ltd. –

  • The Hon’ble Karnataka High Court held that employers must use their CSR spending for the advantage of the society and to “maintain their manufacturing facilities in an eco-friendly way.”
  • As a result, the tax paid on these services will be included in the costs of the finished products, and the firm will be able to claim these taxes as input services.
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Contrary decision – Free Supply of Goods

Section 17(5)(h) of the CGST Act states that “goods lost, destroyed, stolen, written off or disposed off as a gift or free sample are not eligible for ITC on GST payment. The word “gift” is not defined under the CGST Act. Nevertheless, in layman’s terms, a gift is something given to someone freely and without compensation.

Furthermore, according to Section 37 of the Income Tax Act, any expenditure spent by the assessee for CSR activities cannot be regarded to be for business or profession. As a result, it can’t be considered as a business expense. If this is not a business expense, then ITC cannot be claimed on it.

In the case of M/s. Polycab Wires Private Limited –

  • In this case, as part of its CSR efforts, the company provided electrical products to flood-affected residents in Kerala.
  • The Kerala AAR ruled that distributing the necessities to disaster-affected persons under CSR costs should be considered as such if it is done for free and without the collection of any money.
  • As a result, it was determined that ITC would not be available for these transactions under section 17(5) (h) of the KSGST and CGST Act.
  • Nevertheless, in the Uttar Pradesh AAR Ruling, a distinction is made between items given as a “gift” & those supplied as part of CSR spending.
  • Gifts are optional and sporadic in nature, whereas CSR spending is mandatory and consistent.
  • AAR concluded that because CSR spending are not incurred freely and must be expended on a regular basis, they must not be considered as a “gift” and hence would not be barred from claiming ITC under section 17(5)(h).

Obtaining Benefits through Beneficiary in CSR Spending

A corporation makes a financial contribution to a charitable institution, including an NGO, a charitable trust, or a Section 8 company (the “implementing agency”), in order to carry out CSR operations. Nevertheless, in order to perform these duties, these implementing agencies must also employ the services of vendors. These merchants charge GST on the services they provide. Because these implementing agencies frequently do not produce any output, the question arises as to whether these organisations may also claim ITC for the services they provide.

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GST includes the concept of a ‘pure agent.’ According to the explanation to Rule 33 of the CGST Rules, 2017[1], a “Pure Agent” is defined as a person who:-

Obtaining Benefits through Beneficiary

The implementing organizations meet the qualifying criteria of a “Pure Agent.” Rule 33 also includes other requirements that must be met, including the exclusion of expenditures spent by the vendor as a ‘pure agent’ of the recipient of the provider of goods or services from the value of supply.

‘pure agent’ of the recipient of the provider of goods or services from the value of supply.

In this case, if an implementing agency obtains any goods or services from a seller in order to carry out CSR operations on behalf of a corporation, the payment of any such amount to the vendor is treated as a supply made as a “pure agent” by the implementing agency on behalf of the recipient of supply, i.e., the company. As a result, the implementing agencies’ expenditures are excluded from the value of supply and, as a result, are not subjected to GST payment.

Concluding Remarks

Although it appears that costs paid on GST for the fulfilment of CSR undertakings shall be qualified for ITC, there seems to be some uncertainty in the legislative principles. The Kerala AAR has one point of view that prohibits CSR contributions under section 17(5) (h), but the Uttar Pradesh AAR has the exact opposite point of view. An explanation from the appropriate authorities is sought in this respect so that the confusion caused by various decisions can be resolved. After everything is said and accomplished, the amount of the spending to be considered for the purpose of calculating CSR spending remains an issue.

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