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Analysis of GST on Corporate Social Responsibility (CSR)

There is a huge hue and cry in the trade and industry with respect to the applicability of GST provisions on CSR activities. The present article tries to briefly clarify both the input tax credit and taxability CSR activities under GST.

In this Article, you would learn - 1. Basics relating to Corporate Social Responsibility (CSR). 2. Questions involved under GST with reference to CSR activities. 3. Availability of ITC on procurement of goods/ services for performing CSR activities. 4. Judicial Rulings - Favorable & Contrary to taxpayer. 5. Applicability of GST on outward supply of CSR activity. 6. Synopsis.

Basics relating to Corporate Social Responsibility (CSR)-

Before understanding the applicability of GST on CSR activity, firstly let us understand the basics of the CSR activity as covered under the Companies Act.

As per section 135(1) of the Companies Act, 2013, any company satisfying any of the following criteria, during the immediately preceding Financial Year, is required to comply with the Corporate Social Responsibility provisions-

• The net worth of INR 500 Crores or more; or
• Turnover of INR 1,000 Crores or more; or
• A net profit of INR 5 Crores or more.

Accordingly, every year, the applicable company is required to spend at least 2% of the average net profit earned during the immediately preceding three financial years towards corporate social activities.

Questions involved under GST with reference to CSR activities-

As seen above, companies satisfying the criteria are mandatorily required to incur CSR expenditure. However, the following questions under GST vis-à-vis CSR activities are plaguing the trade and industry-

1. Availability of input tax credit on procurement of goods/ services for performing CSR activity; and
2. Applicability of GST on supply of CSR activity.

Both the above questions are briefly discussed hereunder.

Availability of Input Tax Credit on procurement of goods/ services for CSR activities-

While analyzing availability/ non-availability of Input Tax Credit (ITC) used for CSR activities, the following two provisions come into the play-

1. Section 16(1) of the Central Goods and Services Tax Act, 2017; and
2. Section 17(5) of the Central Goods and Services Tax Act, 2017.

Interestingly, both the above provisions provide contradictory conclusions. Let’s us look how-

As per section 16(1), the registered person will be allowed to avail ITC of all the inward supplies which are being used or intended to be used in the course or furtherance of business.

Now, the main question involved here is -

Whether expenditure incurred towards CSR activities can be treated as expenditure/ supplies incurred in the course or furtherance of business?

Notably, GST law doesn’t specifically define the words ‘in the course or furtherance of business’.

However, interpreting the words one can conclude that any activity carried out with a purpose to achieve business principles; objectives; stability and continuity would per se covered as an activity in the course or furtherance of business.

As seen above, companies are mandatorily required to comply with the CSR provisions. Non-complying with the same will have negative repercussion on the business. Hence, conclusively, it can be said that CSR expenditure is incurred in the course or furtherance of business. Accordingly, the companies will be eligible to avail input tax credit on inputs/ input services used towards performing CSR activities.

However, before getting happy with the above conclusion, it is important to go through the provisions of section 17(5) which lists down the situation under which ITC will not be available. Consequently, section 17(5)(h) restricts availment of ITC in respect of goods that are disposed of by way of gifts.

So, what's the litigation in this ?

Interestingly, the departmental officer is generally opposing availment of ITC on the basis of the restriction imposed vide section 17(5)(h) of the CGST Act. Wherein, interpreting wrongfully, the goods distributed under CSR activities are treated as ‘goods disposed of by way of gift’ and thus disallowing ITC availed on such goods. 

Quoting hereunder advance ruling judgement covering both the above contradictory view-

Judicial ruling	Held
Recent favorable judgement to taxpayer- Uttar Pradesh Advance Ruling Authority in the matter of M/s. Dwarikesh Sugar Industries Limited [2020 (1) TR 4302] Dated - 22.01.2020	An applicant is mandatorily required to comply with CSR activities. So, it becomes an essential part of the business process as a whole. Hence, CSR activities are to be treated as incurred in the course or furtherance of business. As CSR activities are not incurred voluntarily, it is opined that the same doesn’t qualify as a gift and therefore ITC is not restricted under section 17(5)(h).
Earlier contrary judgement to taxpayer- Kerala Advance Ruling Authority in the matter of M/s Polycab Wires Pvt. Ltd. [2019 (3) TR 597] Dt. 02.03.2019	An input tax credit is not available as per section 17(5)(h) in respect of free items distributed under CSR activities to flood affected people.

It is important to note here that advance rulings are binding only to the respective applicant. However, the recent judgement covering and clarifying both the sections and allowing the input tax credit is likely to support the trade and industry at a large. Nevertheless, the departmental clarification in the matter can end up all the future litigations in the matter.

Applicability of GST on CSR activity-

Basically speaking ‘supply’ is a taxable event under GST. The term ‘supply’ is defined under section 7 of the Central Goods and Services Tax Act, 2017. The transaction will be treated as ‘supply’ if all the following conditions are satisfied-

• There is a supply of either goods or services or both,
• Such supply is in the course or furtherance of the business,
• The supply is made for a consideration, and
• It is taxable under GST.

Here, one can easily argue that there is no consideration involved in CSR activities. However, the term ‘consideration’ covers a wide range. Further, Schedule I of CGST Act, 2017 provides the lists of the activities which are to be treated as supply even if made without consideration.

Concluding thereby, the supply of goods or services or both by way of CSR activity would qualify as ‘supply’ and accordingly attracts GST.

Synopsis-

The following table summarizes the entire article-

Particulars	Conclusion
Availability of input tax credit on CSR activity.	The input/ input services used for performing CSR activity are incurred during the course or furtherance of business. It is mandatory for the company to incur CSR expenses. Accordingly, ITC is available in terms of section 16 of the CGST Act.
Taxability of CSR activity under GST.	The goods/ services transferred under CSR activity qualify as ‘supply’. GST is payable on such supply.

 

It is very much useful article. I got more clarify on this subject.

A company, to which CSR activity is not mandatory as per laws, incurs some expenses on CSR activity. Will it get benefit of ITC on such material procured and supplied to COVID affected people? What if the material is purchased from unregistered person? Will that company have to pay RCM if applicable in normal circumstances?

As per my understanding If CSR activity is mandatory as per laws then The goods/ services transferred under CSR activity qualify as ‘supply’. and also eligible for itc

Clarity in dept. Analysis on Point.
Just a query, how can it be a supply ? If assets are not transferred?

Further, valuation of the same is also to be made. In case the same is treated as outward supply then the objection of officers claiming it as supply by way of gift / free sample would be nullified being the same classified as supply of goods / services. Would benefit the industry at large

Sir,

We are taking ITC on CSR purchase of goods and paying tax on issuance as compliment as supply. Hence there is no any benefit on this transactions. And taking credit on purchase and paying tax on free issue will lead more interpretations.

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