Whether Input Tax Credit (ITC) is available on expenses incurred towards Corporate Social Responsibility (CSR) activities in compliance with the provisions of the Companies Act 2013 was an area of ambiguity and there were several divergent opinions on the same.
Several companies were voluntarily treating the same as not allowable for ITC, using the analogy of the Income Tax laws by which spend on CSR activities is treated as not allowed as business expenditure, and taking such a stand to avoid litigation.
However, in a recent Order by the Authority for Advance Rulings (AAR) - CBIC, Uttar Pradesh, there has been some clarification on the matter. It is to be remembered though that an Advance Ruling is only applicable to the entity for which such Order is passed. Though the Order comes as a guiding light for companies wanting to claim ITC on such CSR spend.
AAR-CBIC-UP Case: M/s Dwarikesh Sugar Industries Limited vide Order No. 52 dated 22-Jan-2020
Held: Expenses incurred towards CSR by the Company in order to comply with the requirements under the Companies Act, 2013 qualify as being "incurred in the course of business" and therefore, eligible for ITC in terms of the Section 16 of the CGST Act, 2017.
Facts: The applicant is a company engaged in the business of sugar production and trade. The company undertakes CSR activities as required in terms of Section 135 of the Companies Act for which it procures various goods and services on which GST is charged by the supplier.
Points of Contention:
(i) Whether expenses incurred by the company to comply with the requirements of CSR under the Companies Act qualify as being "incurred in the course of business" and eligible for ITC under GST laws?
(ii) Whether free supply of goods as part of a company's CSR activities is restricted under Section 17(5)(h) of CGST Act?
(iii) Whether goods and services used for construction of school building and not capitalized in the books of accounts restricted under Section 17(5)(c)/(d) of CGST Act?
Verdict:
- Any Company that meets the criteria for CSR is mandatorily required to incur expenses for the purpose of undertaking CSR activities to be in compliance with the Companies Act. Non-compliance of these provisions may lead to business disruptions.
- The term "gift" has not been defined under the CGST Act. However, a gift is provided to someone occasionally, without consideration and is voluntary in nature. It was agreed that a clear distinction needed to be drawn between supplies given as "gift" and those made as part of a company's CSR activities. While the former is voluntary and occasional, the later is obligatory and regular in nature.
- CSR expenses incurred by the Applicant have been mandated under the Companies Act, and it is therefore the Applicant's obligation to incur such expenses. The Applicant is compulsorily required to undertake CSR activities in order to run its business and accordingly, it becomes an essential part of his business process as a whole. Therefore, the CSR activities are to be treated as incurred "in the course of business".
- Since CSR expenses are not incurred voluntarily, accordingly, they do not qualify as "gifts" and therefore, its credit is not restricted under Section 17(5) of the CGST Act.
- Section 17(5)(c) and Section 17(5)(d) of the CGST Act have specifically restricted the ITC on construction and works contract service to the extent of capitalization. Accordingly, the ITC of goods and services used for construction of school building will not be available to the Applicant to the extent of capitalization.
