Decoding impact of GST on CSR activities in relation to COVID-19

MEANING OF CORPORATE SOCIAL RESPONSIBILITY:

'Corporate Social Responsibility' means and includes but is not limited to projects or program relating to activities specified in Schedule VII to The Act and projects or program relating to those activities which are undertaken by Board of directors of a company in ensuring the recommendation of the CSR Committee of the Board as per declared CSR policy of the Company along with the conditions that such policy will cover subjects specified in Schedule VII of the Act. Further, as per Section 135(5) of Companies Act, 2013, every company having a net worth of rupees five hundred crores or more, or turnover of rupees one thousand crores or more or a net profit of rupees five crores or more during the immediately preceding financial year shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. Where, CSR Policy relates to the activities to be undertaken by the company as specified in Schedule VII to the Act and the expenditure thereon, excluding activities undertaken in pursuance of normal course of business of a Company

WHETHER THE CSR EXPENDITURE OF A COMPANY CAN BE CLAIMED AS A BUSINESS EXPENDITURE?

Explanation 2 to Section 37 of Income Tax Act introduced via Finance Act, 2014 provides that any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in Section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. Thus, cannot be claimed as business expenditure.

GST PERSPECTIVE

Section 16(1) of CGST Act, 2017 states the eligibility and conditions for taking input tax credit, accordingly, every registered person shall, subject to such conditions and restrictions as may be prescribed, is entitled to take credit of input tax levied 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.

The term 'in the course or furtherance of his business' is not defined under GST Law. However, the term 'Business' is defined under Section 2(17) of the CGST Act which includes any trade, commerce, manufacture, profession, vocation, adventure or wager etc. whether or not undertaken for a pecuniary benefit. The business also includes any activity or transaction which is incidental or ancillary to the aforementioned listed activities. Thus, we can infer that the term 'in the course of furtherance of business' means any supplies made in connection with the business.

WHETHER CSR EXPENSES ARE 'IN THE COURSE OR FURTHERANCE OF BUSINESS'?

One cannot deny that, if CSR expenses are not incurred then it will affect the image of the Company as these are mandatory for prescribed companies. Keeping aside the objective, the same can be said to an activity that is ancillary to the business. 

Reference can be made to the order passed by CESTAT, in case of Essel Propack vs Commissioner of CGST, Bhiwandi where it was held that the CSR activities are to be included within the definition of  'activities relating to business',  based on the handbook on CSR published by Confederation of Indian Industry (CII), major reasons were-

'1) Companies have invested in CSR to enhance community livelihood by incorporating them in their supply chain. It has not only benefited communities and increased their complacency but has provided the company with an additional or secure supply of raw material. 

2) It enhances the reputation of the Company, its goodwill by creating a positive image and branding benefits that continue to exist for companies who operate CSR programmes.'

Therefore, it can be said that the CSR expenses are incurred in the course or furtherance of the business.

INTERPLAY OF SECTION 16(1) AND SECTION 17(5) OF CGST ACT, 2017:

Section 16(1) emphasises on the furtherance of business and Section 17(5) lays down certain restrictions for availing ITC. Furtherance of business is not only the sole criteria to avail ITC, restrictions imposed under 17(5) are also to be satisfied.

Now, the question arises whether the taxpayer can avail input tax credit for the CSR expenses?

CSR expenses are generally those against which the Company has not generated any revenue but ideally it is an activity of providing goods or services free of cost. Section 17(5)(h) restricts the tax credit in respect of the goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Reference can be made to the case of Polycab Wire (P) Ltd. - where the applicant had distributed electric items like switches, fan, cables, etc to flood-affected people in the State of Kerala under CSR expenses on a free basis without collecting any money. Here, the AAR ruled that input tax credit shall not be available as per Section 17(5)(h) of the CGST Act.

Point to be noted:

Section 17(5)(h) does not restrict the tax credit for the services which are used or provided free of cost. So the tax credit against services will be available in the hands of the taxpayers.

CONCLUSION:

During the lockdown, the government has provided various relief to taxpayers in the form of extension of due dates of various returns and other compliances. Steps taken by the Government such as Atmanirbhar Bharat and announcement of a special package of INR 20 lakhs Crore (c.10% of India’s GDP) will definitely augment the Indian economy. PM CARES Fund is created to combat Covid-19 and to provide relief to affected sections of  the society. In order to boost the donations, it has been declared that the same is eligible for 100% deduction under Section 80G of Income tax Act, 1961 and also qualify as CSR spendings under Section 135 of Companies Act, 2013.

In light of above, the Government is urged to allow ITC against the goods which are distributed free of cost (like masks, sanitizers, PPE kits, etc.) by the companies under their CSR policy. Moreover, this facility should be extended to all taxpayers in general. This will reduce some cost on part of the taxpayers and will in turn encourage them to come forward and donate generously for this noble cause.