Gst Implication On Corporate Social Responsibility

Provisions of the Companies Act, 2013 mandates compulsory corporate social expenditure for a specific class of companies. Currently, as the entire world is going through the COVID-19 pandemic, companies are duly disbursing their Corporate Social Responsibility activity. However, the availability of

input tax credit on Corporate Social Responsibility activity has been a conflicting issue. The present article explains the basics of Corporate Social Responsibility, availability of input tax credit, and some important rulings in the matter.

Coverage of Corporate Social Responsibility

As per provisions of Section 135(5) of the Companies Act, 2013, the following companies are mandatorily required to meet the Corporate Social Responsibility requirements-

A company having the net worth of INR 500 Crores or more; or
A company having turnover of INR 1,000 Crores or more; or
A company having a net profit of INR 5 Crores or more.

The company satisfying the above criteria is required to spend, in every financial year, a minimum of 2% of the average net profits made during the immediately preceding three financial years in pursuance of its Corporate Social Responsibility Policy. Schedule VII of the Companies Act, 2013, covers the list of activities that may be included in the Corporate Social Responsibility Policy. Some of which are listed hereunder-

Promoting health care, including preventive health care and sanitation (most relevant during current COVID-19 pandemic).
Promoting education.
Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government.
Promoting gender equality.

Analyzing Corporate Social Responsibility

In order to comply with Corporate Social Responsibility, the company would either be procuring goods or services for free distribution. Given the broad coverage of Goods and Service Tax, the goods or services so procured by the company would generally involve Goods and Service Tax component. Now, the main question involved here is the availability/ eligibility of input tax credit of Goods and Service Tax so levied on the goods or services purchased/ obtained by the company to comply with its Corporate Social Responsibility? For getting the relevant answer to the above question, one needs to refer to the following two provisions-

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

Section 16(1) of the Central Goods and Service Tax Act, 2017 deals with the eligibility and conditions for taking/ availing the input tax credit. According to said section, every registered person shall be entitled to avail the input tax credit charged on any supply of goods or services or both, which are used/ intended to be used in the course or furtherance of the business. In nut-shell, any goods or services used during the course or furtherance of the business would be eligible for the input tax credit. The term ‘used in the course or furtherance of the business’ has comprehensive coverage, and naturally, a lot of input tax credit is available, taking the same as the base. As seen above, specific companies are mandatorily required to comply with Corporate Social Responsibility. Accordingly, it can easily be concluded that any expenditure incurred while carrying out the Corporate Social Responsibility is incurred in the course or furtherance of the business. Hence, the company would be eligible to avail input tax credit. Let us look into the next applicable provision, which is Section 17(5) of the Central Goods and Service Tax Act, 2017. Section 17(5) covers the list of supplies for which input tax credit is not available. Referring provisions of section 17(5) in the context of Corporate Social Responsibility. One can conclude that only sub-section where the input tax credit can be denied is sub-section (h), which covers free sample i.e., free distribution of sample/ goods. However, it is interesting to note that provisions of section 17(5)(h) impose restrictions only on goods, and it doesn’t cover the free provision of service. Due to above two prevailing possibility, clarification from the government would be the welcome step from the trade and industry to conclude the position of the eligibility of input tax credit on Corporate Social Responsibility activity

Important Rulings

Since two views are prevailing in the matter, it is important to go through some of the important rulings relevant in the matter. Advance ruling disallowing input tax credit on Corporate Social Responsibility activity- In the case of M/s. Polycab Wires Private Limited, the company distributed free electrical items like fans, switches, cables, etc. to flood affected people of Kerala under Corporate Social Responsibility. As per section 17(5)(h) of the Kerala State Goods and Service Tax Act and Central Goods and Service Tax Act, it was held that input tax credit would not be available. Tribunal judgment allowing input tax credit on Corporate Social Responsibility activity- In the case of M/s. Essel Propack Limited, Tribunal held that Corporate Social Responsibility could be considered as input service and included in the definition of ‘activities relating to business’. Resultantly, it was concluded that the input tax credit is available on the Corporate Social Responsibility.

Synopsis

There is lot of confusion prevailing in the market with regard to the availability of input tax credit on Corporate Social Responsibility activity. The current pandemic COVID-19 situation and the resultant increase in Corporate Social Responsibility activity demands clarification on the matter. However, the following table would help to clarify the issue to some extent-

Applicable provision	Availability of the input tax credit
Section 16(1)	Input tax credit is available since the activity of Corporate Social Responsibility can be said to be done in the course or furtherance of the business.
Section 17(5)(h)	Input tax credit can be denied. However, restriction is only on input tax credit on free goods distributed under Corporate Social Responsibility activity.

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Frequently Asked Questions

Common questions about GST Implications on Corporate Social Responsibility CSR.

Corporate Social Responsibility (CSR) refers to the legal requirement for specific companies in India to spend a minimum of 2% of their average net profits from the preceding three financial years on activities related to social welfare and development. The Companies Act, 2013 mandates CSR for companies with a net worth of INR 500 crores or more, turnover of INR 1,000 crores or more, or net profit of INR 5 crores or more.

Schedule VII of the Companies Act, 2013 lists the activities that can be included in a company's CSR policy. These include promoting healthcare, education, gender equality, environmental sustainability, and contributions to the Prime Minister's National Relief Fund, among others. During the COVID-19 pandemic, activities related to preventive healthcare and sanitation have become particularly relevant.

The availability of ITC on GST paid for goods or services procured for CSR activities is a contentious issue. Section 16(1) of the CGST Act suggests that ITC should be available since CSR is undertaken in the course of business. However, Section 17(5)(h) restricts ITC on free distribution of goods, which is often the case with CSR.

There have been conflicting rulings from courts and tribunals on this issue. The Kerala Authority for Advance Ruling denied ITC on CSR activities involving free distribution of goods, citing Section 17(5)(h). However, the Tribunal in the case of Essel Propack Limited allowed ITC, considering CSR as an activity relating to business.

As of now, there is no clear-cut position on the availability of ITC for CSR activities. The conflicting provisions in the CGST Act and varying rulings from courts and tribunals have added to the confusion. A clarification from the government would be helpful in resolving this issue.

Section 17(5)(h) of the CGST Act restricts ITC only on free distribution of goods, not services. This implies that companies may be able to claim ITC on services procured for CSR activities, such as hiring consultants or organizers.

The availability of ITC can significantly reduce the overall cost of CSR activities for a company. If ITC is not available, the company would have to bear the entire GST cost on goods or services procured for CSR, increasing the effective expenditure.

Schedule VII of the Companies Act, 2013 includes contributions to the Prime Minister's National Relief Fund as a qualifying CSR activity. Since this does not involve procurement of goods or services, the question of claiming ITC does not arise.

There is no specific reporting requirement for CSR expenditure under GST. However, companies are required to disclose their CSR policies and expenditure in their annual reports as per the Companies Act, 2013.

Companies should carefully assess their CSR activities and the nature of goods or services procured for the same. They should seek professional advice or guidance from regulatory authorities to ensure compliance with both GST and CSR requirements under the respective laws. Maintaining proper documentation and records is also crucial.