ITC on CSR spend – An end to a prolonged dispute

Introduction

India is among the first countries in the world to create a legal framework on Corporate Social Responsibility (CSR) and mandate Companies to report on the same. Corporate Social Responsibility provides companies with a strategic framework to adopt an inclusive and sustainable business approach. The Companies Act 2013 (‘the Act’), through Section 135, mandates companies meeting a certain minimum threshold in terms of turnover/ net worth/ net profit to undertake CSR activities as per Schedule VII of the Act. Therefore,  it is important for business houses to spend a portion of their profit to meet social responsibility. Hence, CSR expenses can be considered as business expenses. 

Dispute with CSR expenditure from IDT standpoint

Goods and Service Tax (GST) was introduced in India in July 2017 with a vision to ensure free flow of Input Tax Credit (ITC) at every stage of the supply chain. Ever since the inception of GST, ITC has been the focus area for the government. With each passing year, the government has introduced several changes in the methodology or eligibility for availing ITC. ITC on CSR expenses has been a controversial issue since the erstwhile regime. Taxpayers in the erstwhile regime were mainly dependent upon judgment passed by various authorities for determining the eligibility of ITC on CSR expenditure, while in GST regime, the Authority for Advance Rulings has taken charge of analysing this issue from a different standpoint. The government, through this year’s Union Budget, has endeavored to end this issue.

Proposed amendment in the Finance Bill 2023

The first Union Budget presented in “Amrit Kaal” was intended to lay down the blueprint for India@100 through a series of reforms and amendments. Most of these reforms were for the development of the Indian Economy. However, one of the proposals is “restriction of ITC on CSR expenses” incurred for fulfilling CSR obligation by way of insertion of clause (fa) in Section 17(5) of the Central Goods and Services Tax Act, 2017 (“CGST Act”). Relevant extract of the Finance Act 2023 has been produced below for ready reference-

“(fa) goods or services or both received by a taxable person, which are 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;”

Position during the pre-GST regime

The question of eligibility of ITC on procurements for fulfilling CSR obligations was heavily debated and litigated in the erstwhile regime itself. Some of the judicial precedents being relied by the taxpayers during the former regime has been produced blow-

• In Essel Propack Ltd. v. Commissioner of CGST, Bhiwandi, [TS-1009-CESTAT-2018-NT], it was held that CSR-related procurements can be considered as ‘input services’ and Cenvat credit is eligible to be availed.
• CESTAT in the case of Power Finance Corporation Ltd. v. Commissioner (Appeal), Central Excise & Service Tax, New Delhi, held that the expenses incurred on CSR could not be termed as “input services” for providing the output services.

Position in GST regime prior to proposed amendment

The GST law does not provide answers to questions deliberated during the erstwhile regime. Therefore, taxpayers had to look upon Authority of Advance Ruling for clarity on eligibility of ITC on CSR spend. However, the conflicting decisions deliberated by different authorities have only created confusion in the mind of the taxpayer. A summary of such rulings has been produced below -

• Dwarikesh Sugar Industries Ltd., [TS-1238-AAR(UP)-2020-GST] – It was ruled that CSR expenses incurred by a company is in the course of business and therefore eligible for claiming ITC in terms of Section 16. It was also ruled that such credit is not restricted under Section 17(5)(h) of CGST Act.
• Adama India (P.) Ltd., [TS-505-AAR(GUJ)-2021-GST] – It was ruled that ITC in relation to CSR expenses was said to ineligible on the perceptive that such activities are not in the normal course of business of the Applicant and therefore, not eligible in terms of Section 16(1) of the CGST Act.
• Polycab Wires (P.) Ltd., [TS-200-AAR-2019-NT] – It was ruled that, the ITC on goods purchased for free distribution to flood victims as part of their CSR activity was denied as the same is covered under the provisions of Section 17(5)(h) i.e., goods disposed by way of gift.
• Bambino Pasta Food Industries Private Limited [TS-581-AAR(TEL)-2022-GST] - It was ruled that, ITC is eligible on CSR expenditure viz. purchase of oxygen plant and parts for donation to a hospital.

Way forward

Although the proposed amendment is expected to give rest to all the speculations on eligibility of ITC on CSR expenses. However, it would be interesting to see the government stand to implement this restriction prospectively or retrospectively. At the same time, the retrospective amendment would lead to the piling up of litigations for taxpayers who have availed such ITC based on its own interpretation of the statue. The prospective amendment would allow taxpayers (not availing any ITC on CSR expenditure) a window to revisit its standing and avail such credit on the expenditure incurred during Financial 2022-23. Further, the proposal covers only those expenditures which are incurred in relation to obligation under CSR as per Section 135 of the Companies Act. Accordingly, whether such restriction of ITC would also be applicable to taxpayers undertaking CSR expenditure voluntarily is still an open-ended issue. 

Nevertheless, the proposal to restrict ITC on such transaction would ultimately add up the cost of business houses of meeting its own social responsibility. It is also imperative to see whether such cost of restricted ITC is considered eligible CSR expenditure in line with Companies Act. The entities impacted by this proposal may consider revisiting their position on CSR activities. The industry should consult tax professionals seeking their expert advice to provide tax optimum solutions within the corners of law.