Corporate Social Responsibility (CSR) refers to the voluntary contribution by certain companies towards a better society and a cleaner environment in the form of projects or programmes.
What are CSR activities or CSR expenditure?
Every company, under Section 135(5) of the Companies Act, is required to comply with the CSR requirements.
The specified companies are as follows:
Every company with any one of the following during the immediately preceding financial year is required to meet Corporate Social Responsibility requirements under the Act:
- A net worth of Rs 500 crore or more
- A turnover of Rs 1,000 crore or more
- A net profit of Rs 5 crore or more
In every financial year, a company is required to spend at least 2% of the average net profits made during the immediately preceding three fiscal years by following its Corporate Social Responsibility Policy. Some of the significant expenditure covered under Corporate Social Responsibility activities are:
- Providing education
- Promoting gender equality
- Projects related to rural development
- Contribution to PM Cares Fund
- Contribution towards the protection of the environment
- Promotion of healthcare, preventive healthcare and sanitation activities related to COVID-19
- Events related to disaster management including relief activities
For more details about the applicability, importance, and latest updates on the permitted activities under CSR, read - Corporate Social Responsibility.
Availability of ITC on CSR activities
A) 1st school of thought - No ITC available on CSR activities
For understanding the availability of ITC on CSR activities, let us first understand some of the crucial definitions under GST.
1) Supply: Supply is a taxable event under GST. The liability to pay tax under GST arises at the time of the supply of goods or services. Supply includes:
- Lease, and
Any person who engages himself in any of the above activities is covered under the definition of supply under GST. Further taxable supply means a supply of goods or services or both which are subject to tax under the GST Act.
2) Goods: Goods means all kinds of movable property. It includes actionable claim, growing crops, grass and, things attached to or forming part of the land. However, it does not include money and securities.
3) Services: Services include any activity other than goods, money and securities. It consists of all the activities related to the use of money or conversion of money from one form to another. Separate consideration is charged for this.
4) Business: Business means any activity carried out by a person including trade, commerce, manufacture, profession, vocation, adventure or wager whether or not it is carried out for a monetary benefit.
On looking into the input tax credit provisions, Section 17(2) of the CGST Act has a point. The taxes paid on inputs can be claimed as ITC only if the outputs are taxable supplies. Also, as per section 17(5)- Block Credit, ITC is not available for goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
In the case of Corporate Social Responsibility activities, a company is providing outputs/output services free of cost. Thus, by taking into consideration the definition of taxable supplies and provisions of section 17(2), input credit cannot be availed on CSR activities.
Further, even as per Section 37 of the Income Tax Act, any expenditure incurred by the assessee with regards to CSR activities cannot be deemed by the assessee for business or profession. Thus, it cannot be claimed as business expenditure. If this is not a business expenditure, then ITC cannot be claimed on such spending.
Popular Advance Ruling
Polycab Wires Private Limited - In this case, the company had distributed electrical goods to the flood-affected people in Kerala in the course of its CSR activities. The AAR held that the company had distributed electrical products free of cost and thus ITC would not be available as per Section 17(5) of the KSGST and CGST Act. Thus, the provisions of section 17(5) were invoked to deny ITC on goods distributed under the obligations of the CSR activities.
B) 2nd school of thought - ITC is available on CSR activities
2nd school of thought is that ITC is available on CSR activities because they are incurred in the course or furtherance of business. CSR activities have a high impact on the image of the company and are also mandatory as per the provisions of the Companies Act, 2013. It enhances the reputation of the company and thus creates the goodwill of the company. Therefore, it can be ascertained that Corporate Social Responsibility activities are incurred in the course or furtherance of business. So, ITC can be claimed for such events.
Popular Case Law
Essel Propack Limited vs Commissioner of CGST - Mumbai CESTAT held that ITC could be claimed for the expenditure incurred for CSR activities. The Tribunal held that CSR activities improved the image of the company, and thus they can be considered as activities relating to business.
Hence, the government should come out with a clarification regarding allowing ITC on CSR activities. Disallowance of the same will put a burden on the companies.