The Goods and Services Tax (GST) is recognised as the most comprehensive and all-encompassing reform in the realm of indirect taxation, essence of which lies in ensuring uninterrupted and seamless stream of Input Tax Credit (ITC). While ITC has been the focal point of numerous GST discussions and has undergone countless deliberations throughout the years, the million-dollar question is whether the objective of the cornerstone of robust GST architecture i.e., seamless ITC flow, has been accomplished? This lingering question is one of the crucial matters which are endeavoured to be addressed by the government.
Interplay between CSR and ITC under GST
In this changing scenario, the Government of India (GOI) is persevering significant developments in ITC provisions to unveil the uncertainties prevailing in the industry. One of such longstanding debates was ITC eligibility on corporate social responsibility (CSR) spends. Companies surpassing certain prescribed thresholds in terms of net worth, turnover or profit are mandated by the Companies Act, 2013, to undertake CSR activities (at least 2% of average net profits made during three immediately preceding FYs), thereby prompting a sharp rise in related expenses. Further, the Ministry of Corporate Affairs (MCA), vide its circular1, has delineated certain modes of CSR spendingviz. ‘Contribution routes’ or ‘Activities route’. Albeit cash donations lie outside GST ambit, the legislation does not explicitly address provisions for donations in kind (goods or services), raising a crucial question – Are GST payments made on procurements for CSR expenditure eligible for ITC?
The ongoing discourse is premised on consideration of two fundamental aspects – i) Whether such CSR spending can be deemed to be incurred in ‘the course or furtherance of business, and ii) If there are any explicit restrictions for ITC on respective spends within arrangements of GST law. This long-lived dubiety about ITC eligibility on CSR expend has been carried forward as a legacy from the erstwhile regime into the current GST era. The need for certainty regarding this issue was further amplified, particularly in light of substantial CSR expenditures incurred post-pandemic and divergent tax positions adopted by the industry.
Proposal vide the Finance Act 2023 – An end to a prolonged dispute
As we are cognizant, Section 17 of the Central Goods and Services Tax Act, 2017 (CGST Act), provides for specific clauses to restrict ITC under GST. Captivatingly, the GOI vide the Finance Act 2023 has put forth a proposal to address aforesaid issue through insertion of a new restrictive clause (fa) under Section 17(5) of the CGST Act, which reads as follows:
“Goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013”
In view of the above, it may be inferred that the ITC shall not be available in respect of goods or services, or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under CSR referred to in Section 135 of the Companies Act, 2013. However, said amendment is yet to be notified.
Seeking to address divergent views within the industry, the proposal seems to be driven by the twin rationale – a) Increase in tax retention by the government for further societal contribution; and b) Aiming to align it with direct tax laws where deductions are not permitted for various CSR expends.
An unsettled dispute – prior to proposed amendment
Prior to the proposed amendment, ITC eligibility on CSR expenses had always been a vexed issue under GST and pre-GST era. Formerly, taxpayers relied on various judgments to ascertain respective CENVAT eligibility, while in the GST regime, taxpayers have increasingly sought clarity through advance rulings to establish a definite tax position. Resultantly, divergent rulings have emerged, some recognising CSR spending as falling within the course of business, while others have considered it outside the normal scope.
The Kerala Advance Ruling Authority (AAR), in case of Polycab Wires (P.) Ltd., In re2 had earlier disallowed ITC on CSR activities treating same as gift. Also, Gujarat AAR, in case of Adama India (P.) Ltd., In re3 held that CSR activities are in pursuance of statutory obligation and not in normal course of business, hence considered the respective ITC to be ineligible. Likely, under the erstwhile regime, CESTAT Delhi, in the case of Power Finance Corpn. Ltd. v. Commissioner CE&ST LTU, 4, had disallowed CENVAT credit on CSR expenses, as such expenses could not be termed as input services for providing the output services, though being a legal responsibility.
Contrary to above, the Uttar Pradesh (UP) AAR, in case of Dwarikesh Sugar Industries Ltd., In re5 referring to a SC judgement in case of Ku. Sonia Bhatia v. State of UP6, mentioned that ‘Gift’ not being defined under GST law, in common parlance means anything provided voluntarily, without any consideration. On the other hand, goods provided as part of CSR are obligatory and regular in nature for business purposes, hence found as eligible by the UP authority. The AAR also referred to decisions of Mumbai CESTAT in case of Essel Propack Ltd. v. Commissioner of CGST7 and of Karnataka HC in case of CCE v. Millipore India (P.) Ltd. 8 under the erstwhile regime, wherein it was held that CSR is not charity but a mandatory activity augmenting the credit rating of a company in the corporate world. A similar view was also established by the Telangana AAR in case of Bambino Pasta Food Industries (P.) Ltd., In re9 under GST.
Possible impact – Proposed amendment
Amidst the ongoing litigation and extensive contemplation within the industry, the GOI has endeavoured to bring a resolution to the prolonged issue by introducing a new restrictive clause. However, it may be construed that such restriction may elevate the cost of corporate organisations for meeting their mandatory social obligations. Alternatively, same may have a dwindling impact on contribution by corporates for CSR initiatives as a whole and may eventually affect the intended beneficiaries of such initiatives. Whilst, under both the scenarios, the government’s revenue may be augmented with enhanced tax retention.
While the GOI has attempted to clear the dust on this issue with proposed ITC restriction for mandatory CSR spends, there is room to debate whether credit restrictions should also apply to CSR activities surpassing specified limits or if undertaken by entities without CSR obligations or non-corporates. While believing that the ITC restriction will be prospective, recovery measures for ITC availed in the past are looming threats on the horizon and explicit clarification is anticipated to mitigate any dispute.
In the aftermath of the proposed amendment, a comprehensive circular addressing above aspects would be welcomed for plugging any related challenge/s and to clear the smoke. This would help alleviate any uncertainty surrounding the interpretation and application of the proposed clause, ensuring its limited scope is not extended to analogous scenarios contrary to the expressed intent.
This article was originally published in TAXMANN.