INPUT TAX CREDIT ON CSR EXPENSES
What is CSR?
Section 135(5) of The Companies Act, 2013 requires every eligible company (as per section 135(1)) to spend at least 2% of the average of net profits of immediately preceding 3 financial years towards Corporate Social Responsibilities (‘CSR’) activities.
As per rule 2(d) of The Companies (Corporate Social Responsibility Policy) Rules, 2014, as amended time to time, ‘Corporate Social Responsibility’ means the activities undertaken by a company in pursuance of its statutory obligation laid down in section 135 of the Companies Act 2013, in accordance with the provisions contained in CSR Rules 2014, but shall not inter alia include activities undertaken in pursuance of normal course of business of the company with an exception provided for companies engaged in research and development activity of new vaccine, drugs and medical devices.
Further, Schedule VII to the Companies Act 2013 specifies the activities which may be included by companies in their CSR policies which includes activities such as eradicating hunger, poverty and malnutrition, promoting health care, promoting education, promoting gender equality, training to promote rural sports, nationally recognised sports, contribution to the Prime Minister’s National Relief Fund, Contributions to public funded Universities etc.
MCA vide Circular No. 14 /2021-CSR-MCA dated 25th August 2021, has clarified that CSR expenditure can be incurred in multiple modes viz.
‘Activities route’, which is a direct mode wherein a company undertakes the CSR projects or programmes as per Schedule VII of the Act, either by itself or by engaging implementing agencies and
‘Contribution to funds route’, which allows the contributions to various funds as specified in Schedule VII of the Act.
Analysis of provisions of The Income Tax Act, 1961 (referred as ‘Income Tax Act’) and The Goods and Services Act, 2017 (referred as ‘GST Act’)
1. Income Tax Act: It is pertinent to note that deduction for CSR expenditure is not allowed under Income Tax Act, 1961. As per explanation 2 to sec 37 of the Income Tax Act 1961, “any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession”.
Central Board of Direct Taxes (‘CBDT’) has clarified that – “CSR expenditure, being an application of income is not incurred wholly and exclusively for the purpose of carrying on a business. If such expenses are allowed as a tax deduction, this would result in subsidizing of around one-third of such expenses by Government by way of tax expenditure.” On a perusal of the above, by way of deeming fiction, deduction of CSR expenses is not allowed under Income Tax Act deeming it not to be for business or profession.
Eligibility of ITC on CSR expenses in GST
1. As mentioned above, apart from the requirement of sec 16(1) of the CGST Act 2017, eligibility of ITC is further subject to satisfaction of other prescribed conditions and restrictions given u/s 17(5).
2. Hence, in order to claim ITC of GST paid on inward supplies relating to CSR, following two key aspects should be evaluated: Whether the expenses incurred are ‘in the course or furtherance of business’? Whether it is blocked u/s 17(5) of the CGST Act 2017?
3. 1st criteria is generally fulfilled in case of expenses incurred for CSR (i.e. CSR expenses would qualify as expense incurred ‘in the course or furtherance of business’ as discussed above.
4. We have evaluated the 2nd criteria hereunder: – The relevant provisions of sec 17(5) have been produced hereunder: “Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely;-
(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
(d) goods or services or both received by a taxable person for construction of an immovable property.
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
” There could be instance whereby company may incur CSR expense voluntarily which could be over and above the expense mandated in terms of the provisions of the Companies Act, 2013. Accordingly, in case of excess voluntary CSR expenditure on the procurement of services, one may argue that such expenses help the business to create goodwill and brand value. Thus, a mandatory requirement under the Companies Act should not only be the only parameter to judge whether or not expenses on CSR is in the course or furtherance to business. CSR expenses over and above the mandatory limit should also be considered as business expenses (in case of procurement of services.)
However, in case of procurement of goods for CSR expenditure which are over and above the mandatory limit, ITC restriction in terms of section 17(5)(h) should be analysed. Section 17(5)(h) restricts the ITC on goods which are disposed of by way of gift. The term “gift” has not been defined under the GST Act. However, in common parlance, gift is provided to someone occasionally, without consideration, and is voluntary in nature.
Further, gift is a gratuity and an act of generosity. There is no mandatory requirement/ obligation on the provider to provide such gift. Mandatory CSR expenditure is not a gift since it is done under an obligation laid down by the Companies Act. Hence, ITC in such a scenario shall be eligible. In case of procurement of goods, voluntary (over and above the mandatory limit) CSR expenses may qualify as gift since it is not done under an obligation. It is given voluntarily. Hence, ITC in such a scenario shall not be eligible. Important to note that this restriction is not applicable to services. Thus, ITC on services [subject to section 17(5)] used in voluntary CSR expenses shall be available.
In our view, the companies undertaking CSR projects can only have the query on ITC availment of goods and services used to incur CSR expense and no query on ITC pertaining to capital goods. This is because CSR expenses are never capitalised in books of accounts. Instead, the same are debited to the Profit or Loss account in financials. Accordingly, restriction on ITC availment as mentioned in section 17 (5) (c) and section 17 (5) (d) would never apply in the case of CSR expenses since these ITC restrictions are triggered only in case of capitalisation of such expenses.
