ITC eligibility of CSR expenditure under GST and Finance Bill, 2023

The simple meaning of CSR is charity. The companies undertake CSR activities either by way of donating money to charitable organisation, or by providing goods or services free of cost.

Upto March 2014, the companies were undertaking CSR activities as per their internal polices. However, from 1 April 2014, the section 135 of Companies Act, 2013 made mandatory for certain categories of companies to undertake CSR. Also, the activities which should be undertaken as part of CSR are listed in Schedule VII to the Companies Act, 2013.

CSR expenditure under Income Tax Laws

As per Explanation 2 to Section 37(1) of the Income Tax Act, 1961, CSR expenditure incurred under the Section 135 of the Companies Act is not allowed as deduction.

CSR expenditure under earlier regime

CENVAT Credit Rules, 2004 states that CENVAT credit on goods and services used for CSR activities was neither specially allowed nor disallowed under the CEVAT Credit Rules. There were rulings which provided guidance to the taxpayers.

The Mumbai Tribunal in the case of Essel Propack Ltd. [TS-1009-CESTAT-2018-NT] observed that CSR is not a charity anymore, infact, it is directly related to the manufacturing activity of the company. It also observed that CSR activities is mandatory by the Companies Act, 2013 and performing these activities enhances the credit rating of the company in the `corporate world. Accordingly, Tribunal held that credit of service tax paid on input services procured for CSR activities is allowed.

The Larger Bench of Mumbai Tribunal in case of Reliance Industries Limited [2022 (60) G.S.T.L. 442 (Tri. - LB)] allowed CENVAT credit on input service procured by the company as the part of CSR activities. On the contrary, division bench of Delhi tribunal in the case of Power Finance Corporation Limited [2022 (6) TMI 582 - CESTAT New Delhi] held that credit of service tax paid on input services used for CSR activities is not allowed.

CSR expenditure under GST regime

Section 16(1) of CGST Act, 2017 provides that input tax shall be allowed on goods or services which are used or intended to be used in the course or furtherance of business. Further, Section 17(5) disallows credit on certain goods and services.

It is pertinent to note that the GST provisions do not specifically allow or disallow input tax credit on CSR expenses. Further, there is no explanation similar to what is available under the Income Act. Thus, one may take a view that credit is available under GST. However, the department places reliance on clause (h) of section 17(5) to disallow CSR related credit which restricts ITC on goods given in the form of gifts.

Advance Rulings under GST

Taking into account various issues on ITC eligibility, the Government decided to introduce amendment in Section 17(5) of the CGST Act.

Finance Bill, 2023

The Government inserted clause (fa) in Section 17(5) of the CGST Act, 2017 which reads as under:

Section 17(5). Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

“(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;”

The amendment states that input tax credit on goods and services received by companies to undertake CSR activities under section 135 of Companies Act, 2013 is not allowed. The amendment will come into effect from the date to be notified.

Potential issues in amendment

i. Whether companies can take credit of procurements made until this new provision is notified?

ii. What is the scope of the phrase “activities relating to his obligations under CSR”?

iii. What is the meaning of the phrase “intended to be used”?

iv. Whether credit is allowed if CSR expenditure is incurred by the Company over and above the mandatory threshold?

v. Whether credit is allowed if CSR expenditure is incurred by partnership firm, etc.?

For video presentation and answer to various issues please click on the link