GST implications of CSR (Corporate Social Responsibility)

27 Sep, 2021 Pradeep S
GST implications of CSR (Corporate Social Responsibility)

Corporate Social Responsibility (CSR) is a vital element of governance for companies. In India, companies that meet certain criteria are required to undertake CSR activities. The Companies Law regulates such activities of the corporates. Initially, the regulation went by the philosophy of “comply or explain” and recently drastic changes have been brought about. Companies are now required to report in a detailed manner in the Board Report about the CSR activities; park unspent amounts in separate bank accounts and where the amounts are not used on the avowed activities within a span of three years, to transfer the amount to notified funds. Disobedience invites stringent penal provisions. In short, these activities have more or less become integral to carrying on of business.

The article is an attempt at understanding the GST implications. Companies end up purchasing inputs or input services or capital goods in the process. The initial issue is whether such activities are incurred in the course of or furtherance of business to be eligible for the GST input tax credit. The recent amendments in the company law give it a sheen of mandatory nature though income tax law does not allow such expenses in computing the taxable income. However, all recent advance rulings have endorsed the view that the activities are necessary for carrying on the business.

The second question that arises is whether the GST input tax credit is available on such inputs, input services, and capital goods. As long as input services do not fall foul of section 17(5), the input tax credit will be available. However, in the case of inputs and capital goods, section 17(5)(h) states that input tax credit will not be available in respect of goods stolen, lost, destroyed, written off, or given by way of gift or free samples. There are contradictory advance rulings on this subject. 

In the case of Polycab, the Advance Ruling Authority in Kerala denied input tax credit in respect of goods that were given away as part of CSR activities invoking the aforesaid section. The ruling effectively treated it as a gift or gratuitous transfer made voluntarily.

On the other hand, the Advance Ruling Authority in UP has taken a contradictory view in the case of Dwarikesh Sugar Industries Limited and allowed input tax credit on goods purchased for CSR considering the fact that CSR is now mandatory. 

Since the above two rulings are advance rulings, the final word from the judiciary is yet to be spoken on the subject. 

The rationale given in certain other rulings while interpreting section 17(5)(h) adds to the confusion. The Madras High Court was called upon to decide whether input tax credit needs to be denied under this section on the portion of inputs normally or inherently lost during the manufacturing process. The Court interpreted section 17(5)(h) as covering only loss or write-off that arise from external factors or compulsions. Are the goods or input services disposed of as part of CSR activities and therefore written off in the books due to external compulsions is a moot point. 

Moreover, there are advance rulings that interpret the distribution of sales promotion material as non-taxable supply which implies that the said inputs are ineligible for the input tax credit. Such a line of thought with regard to goods dispensed away for CSR activities will make the water murkier. In the event of ITC being availed, the outward supply of goods will become a taxable supply even without consideration in view of the fact that it amounts to permanent transfer or disposal of business assets where input tax credit has been taken on such assets. The taxpayer would be compelled to reverse the input tax credit availed.

In view of the above, it is high time the Government comes out with a gst update circular clarifying all the issues involved. When a company incurs the spend on CSR and avails input tax credit on input services, then the disclosure under the Company Law has to be made excluding the value of GST.

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