Is ITC under GST available on CSR activities?
Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax.
According to Section 16(1) of the CGST Act, Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
Section 17(5) pertains to blocked credit under CGST Act which states the situations where input tax credit shall not be available. Certain situations when ITC cannot be claimed:-
1.A person cannot avail ITC wherein the given motor vehicle is used to transport people and has a seating capacity of less than or equal to 12 +1 (driver)
2. A person cannot claim ITC for the tax paid for the following:-
i. Food and beverages
ii. Outdoor catering
iii. Beauty treatment
iv. Health services
v. Cosmetic and plastic surgery
3. Services of general insurance, servicing, repair and maintenance
4.Sale of membership in a club, health, fitness centre
5. Rent-a-cab services, life insurance, health insurance
6. Travel, benefits extended to employees on vacation such as leave or home travel concession.
7. Works contract services for construction of immovable property
8. Construction of immovable property on own account
9. Composition scheme
10. Non residents
11. Supply for personal use
12. Free samples and goods destroyed
13. Restaurant services
Though not explicitly mentioned in the above list, will ITC be available on goods or services received for fulfilling Corporate Social Responsibility?
What do you mean by CSR?
Corporate Social Responsibility is a concept whereby companies integrate social and environmental concerns in their business operations. The Companies Act, 2013 has formulated Section 135 and the Companies (Corporate Social Responsibility) Rules, 2014 which prescribes mandatory provisions for Companies to fulfil their CSR. Section 135(5) of the Companies Act, 2013 states that CSR expenditure in every fiscal year, should amount of minimum 2% of the average net-profits of the company made during 3 instantly before financial years, in achievement of CSR policy.
Can ITC be claimed on amount expensed under CSR?
- According to Section 16, every registered person shall, subject to conditions and restrictions as may be prescribed, be entitled to take ITC on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business.
- ‘In the course or furtherance’ is not defined, but is broad enough to cover any supplies made in connection with the continuation of carrying the business.
- CSR Activities are said to be carried out mandatorily as per Sec 135 of The Companies Act, 2013.
- Non-compliance of CSR would lead to violation of the statutory provisions which in-turn affects the business activities.
- So, it can be understood that ITC could be availed on expenditure made for CSR Activities as it is in the course or furtherance of business.
What do you mean by business?
Business is defined under section 2(17). Business includes:-
a. Any trade, commerce, manufacture, profession, vocation, adventure, wager or any other related activity, whether or not it is for a financial benefit;
b. Any activity or transaction in connection with or random or extra to (a) above;
c. Any activity or transaction in the nature of (a) above, whether or not there is volume, constancy, time or stability of such transaction;
d. Supply or acquisition of goods including capital assets and services in connection with origin or stoppage of business;
e. Provision by a club, association, society, or any such body (for a membership or some other thought) of the facilities or benefits to its members, as the case may be;
f. Admission, for a consideration, of persons to any campus; and
It can be deduced from the above that the term ‘business’ could mean a number of things. It is a broad concept. It cannot be merely restricted to supply of goods and services. Before the final supply is made a number of activities are conducted before hand. The CSR expenditure is a mandatory expenditure. Compliance with the provisions of the Companies Act is essential, if the business wants to run smoothly. So ideally it should be allowed.
Let us refer to some conflicting case laws to understand this better:-
In re M/s. Polycab Wires Pvt. Ltd. (GST AAR Kerala) (2019), it was held that the applicant had distributed electrical items like, switches, fan, cables etc. to flood affected people under CSR expenses on free basis without collecting any money. For these transactions input tax credit will not be available as per Section 17(5)(h).
However in the case of Essel Propack Ltd. Vs Commissioner of CGST, Bhiwandi (CESTAT Mumbai) dated August 31, 2018, CESTAT observed that CSR is not in the nature of charity as it has got a direct bearing on the manufacturing activity of the company which is largely dependent on smooth supply of raw materials.
The Tribunal thus held that such expenses are incurred to win the confidence of the stakeholders and shareholders. It also noted that CSR which was a mandatory requirement for the public sector undertakings, has been made obligatory also for the private sector and unless the same is to be treated as input service in respect of activities relating to business, production and sustainability of the company itself would be at stake. Hence, Cenvat credit was allowed to the appellant.
CSR activities are those activities which give indirectly benefits to company & helps to run its business. ITC on CSR activity is legal requirement and it mandate company to do the same, therefore, it is also one of the reason to consider as eligible ITC until & unless transactions specifically covered under sec 17(5) i.e., Block Credit.
Government has not clarified on it yet. The contradictory judgement just increases the confusion. However, intention of Government to come up with GST is to widen the scope and flow of ITC. GST provides free hand to take ITC on all inputs or input services except transaction covered u/s 17(5). Any clarification by the Government is welcome.