ITC on CSR Expenses

CSR refers to Corporate Social Responsibility. As per Section 135(5) of Companies Act, 2013 every eligible company is required to spend at least 2% of the average of net profits of immediately preceding 3 financial years towards Corporate Social Responsibilities (CSR) activities.  From the purpose of GST the main question is whether the company would be eligible to claim ITC in respect of GST paid on such CSR expenses incurred by the company. The same is discussed under this article.

Under GST law for claiming input tax credit in respect of any expense the primary requirement of section 16(1) of CGST Act 2017 is that ITC is available only on those expenses which are incurred in the course or furtherance of business. Further section 16(2) contains the other conditions for claiming ITC. The said sub section 2 of section 16 states that;

“(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,

(a) He is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;

(b) he has received the goods or services or both.

Explanation.- For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services-

(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person.

(ba) the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted

(c) Subject to the provisions of section 41 or  the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and

(d) He has furnished the return under section 39”

The another important thing that one has to keep in mind while claiming ITC is that ITC of such expense should not be blocked under section 17(5) of CGST Act. If any expense is blocked under section 17(5) then ITC would not be available of such expense even if the conditions of section 16 are fulfilled.

In Finance Act 2023, an amendment was made in section 17(5) by way of inserting a clause (fa) after the clause (f). In the said clause (fa) the ITC is blocked of goods or services or both received by a taxable person, which are used for activities relating to the obligations under corporate social responsibility. Subsequently, by way of Notification No. 28/2023-Central Tax dated 31.07.2023 said amendment become effective w.e.f. 01.10.2023.

Hence with effect from 01.10.2023 as per newly inserted clause (fa) the input tax credit is being blocked for goods or services used in for fulfilling the obligations of corporate social responsibility. Accordingly, it now clear that with effect from 01.10.2023, no input tax credit would be available in respect of CSR expenses incurred by the company.

However before such amendment the ITC of CSR expenses was always a debatable issue. There are various advance rulings in this regard. To answer the question of eligibility of ITC of CSR expenses, there are different views of different Advance Ruling Authorities. For example, the Authority for Advance Ruling of Uttar Pradesh, in the case of Dwarikesh Sugar Industries Limited [2020(01)LCX0257(AAR)], held that the expenses incurred by the company in order to comply with requirements of Corporate Social Responsibility under the Companies Act, 2013 qualifies as being incurred in the course of business and eligible for input tax credit in terms of the Section 16 of the CGST Act, 2017.

In contrast, the Authority for Advance Ruling of Uttar Pradesh in the case of Shriram Pistons & Rings Limited [2022(12)LCX0196(AAR)] held that as per Companies (CSR Policy) Rules 2014, the CSR activities are those activities which are excluded from the normal course of business of the applicant and therefore not eligible for ITC as per Section 16(1) of the CGST Act 2017.

Additionally, the Kerala Authority for Advance Ruling, in the case of Polycab Wires Private Limited [2019(03)LCX0156(AAR)] held that as the applicant has distributed electrical items like, switches, fan, cables etc. to flood affected people under CSR expenses on free basis without collecting any money. Which would be treated as gifts and for these transactions input tax credit will not be available as per Sec. 17(5)(h) of the KSGST and CGST Act. Accordingly the authority disallowed the ITC on said CSR activities by treating them as gifts.

Similarly, the Gujarat Authority for Advance Ruling, in the case of Adama India Private Ltd. [2021(08)LCX0175(AAR)], held that CSR activities are not considered part of the normal course of business and thus the respective ITC is ineligible. In such case the appellant has also filed an appeal before the Appellate Authority for Advance Ruling. However the Appellate Authority rejected the appeal filed by appellant and upheld the ruling of lower authority that CSR activities, as per Companies (CSR Policy) Rules, 2014 are those activities excluded from normal course of business of the applicant and therefore not eligible for ITC, as per Section 16(1) of the CGST Act.

As the recent amendment in section 17(5) has provided some clarity on the eligibility of claiming Input Tax Credit on Corporate Social Responsibility (CSR) expenditure and this amendment is effective with effect from 01.10.2023. Hence the next question that arises here is what would happen to the ITC on CSR Expenses before the effective date of the amendment. As the amendment is prospective in nature, it creates uncertainty regarding the eligibility of ITC on CSR expenditures made prior to the implementation of the new provision.

Accordingly a clarification is expected from the CBIC in this regard that if before 01.10.2023, some taxpayers have not claimed ITC of CSR expenses due to ambiguities in this regard. Whether such person would now be eligible to claim ITC of earlier period before amendment by considering the time limit of section 16(4) or not and whether taxpayers who voluntarily reversed ITC on CSR activities, due to ambiguity, can re-avail the ITC once the amendment is in effect. This aspect raises concerns about the treatment of previously reversed ITC and whether it can be reclaimed to offset future tax liabilities.

Conclusion: With effect from 01.10.2023 due to insertion of clause (fa) in sub section 5 of section 17 of CGST Act 2017 the input tax credit in respect of GST paid on expenses incurred for CSR expenses would not be allowed.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.