Availment Of ITC On Corporate Social Responsibility (CSR)

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It has been 4 years since GST came into force, yet there is no clarity with respect to certain major issues, one of which is availment of Input Tax Credit on Corporate Social responsibility.

After inception of GST, multiple advance rulings have been sought in respect of ITC on CSR expenditure but two have caught our eye as the rulings were passed in drastic contrast to each other.

In the advance ruling of M/s. Polycab Wires Private Limited in AAR – Kerala, Ruling No. KER/30/2019 dt. 02.03.2019, it was ruled that ITC shall not be available since the CSR expenditure was covered under Section 17(5)(h) of CGST Act 2017. It was observed by the Hon’ble AAR that such transactions were in nature of gift or free supply.

Whereas, in ruling of M/s. Dwarikesh Sugar Industries Limited in AAR – Uttar Pradesh, Ruling No. 52 dt. 22.01.2020, it was ruled that ITC in respect of CSR Expenditure was available as, such expenditure was incidental/ancillary to the business as the company is compulsorily required to undertake such activity.

After reading the brief of both the judgments, the question arises whether ITC is available on CSR Expenditure?

In order to answer the above question, we need to understand as to what is CSR?

Definition of CSR

There is no single universally accepted definition of Corporate Social Responsibility, but references can be taken from the World Bank CST which defines CSR as ‘the continuing commitment by business to contribute to economic development while meeting the quality of life in the work place and their family as well as of the community and society at large.’

Further, UNIDO elaborates it by saying that in this sense it is important to draw a distinction between CSR, which can be a strategic business management, and charity, sponsorship or philanthropy.

Applicability of CSR

Before enactment of Companies Act 2013, reference can be drawn to Office Memorandum dated 9th April 2010 (which superseded guidelines dated 29.11.1994), issued by DPE which had made CSR mandatory for Central PSE’s.

As per Sec 135 of Companies Act 2013,

(1) ‘Every company having

  • net worth of rupees five hundred crore or more, or
  • turnover of rupees one thousand crore or more, or
  • a net profit of rupees five crore or more

during the immediately preceding financial year. Shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.’

(5) ‘The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:

Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.’

(6) Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.

(7)‘If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or unspent Corporate Social Responsibility Account, as the case maybe, or two lakh rupees, whichever is less.’

Our Opinion

CSR in India has become an integral and essential part of Business process, without which, a Business cannot sustain.

Business has been defined under Sec 2(17) of CGST Act 2017, as including –

‘(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction…….. (i) ………. engaged as public authorities;

As stated above, CSR can be identified as an activity which is incidental or ancillary to business process.

To give credibility to our statement, we would like to quote Hon’ble CESTAT Mumbai, in case of M/s Essel Propack Ltd. Vs Commissioner of CGST, Bhiwandi, who stated that ‘CSR is not only a holistic approach but it has integrated the core business strategy since it addresses the wellbeing of all stake holders and not just companies’ shareholders.

The essence of the above discussion would indicate that CSR is not a charity any more since it has got a direct bearing on the manufacturing activity of the company which is largely dependent on smooth supply of raw materials even from remote location or tribal belts (that requires no resistance in the supply chain from the community) and the same also augments the credit rating of the company as well as its standing in the corporate world.

Therefore sustainability is dependent on CSR without which companies cannot operate smoothly for a long period as they are dependent on various stake holders to conduct business in an economically, socially and environmentally sustainable manner i.e. transparent and ethical.’

Any business has multiple stakeholders that can range from its shareholders (who have an economic interest in the company) to government, union, environment etc. While any business earns money to keep its economic shareholders happy, it is ethically obligated to spend money in the form of CSR to keep its other stakeholders (society) satisfied.

In our understanding, CSR shall not be treated as a gift or free supply as given in Advance ruling of M/s. Polycab Wires Private Limited in AAR – Kerala, since gift or free supply is voluntary and occasional, whereas CSR, by virtue of Companies Act, is obligatory and recurring in nature.

The concept of CSR was brought to benefit society as a whole. While the Companies Act has mandated certain classes of companies to spend 2% of Avg. net profits of the last 3 years, if ITC on the same is availed then it can effectively be 2.44 % (assuming 18% rate of GST) approximately.

To conclude, we would like to state that under GST, ITC on CSR should be availed since the same can be treated as incurred in the course and furtherance of Business. Since, Advance Rulings are applicable only to the applicant and its jurisdiction officers, in our view, Companies should go for advance ruling and avail ITC on the same. Alternatively, ITC may be availed, without going for Advance Ruling, by informing jurisdiction officer (beware that this may lead to future litigation).

Disclaimer: This article represents the views of the writer and has been written for educational purposes only.

Written by: Jaskamal and Shubham

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