[Opinion] GST ITC on CSR spend – An end to a prolonged dispute

Krishan Arora, Sachin Sharma & Sahil Gera – [2023] 147 taxmann.com 265 (Article)

Introduction

India is among the first countries in the world to create a legal framework on Corporate Social Responsibility (CSR) and mandate Companies to report on the same. Corporate Social Responsibility provides companies with a strategic framework to adopt an inclusive and sustainable business approach. The Companies Act 2013 (‘the Act’), through Section 135, mandates companies meeting a certain minimum threshold in terms of turnover/net worth/net profit to undertake CSR activities as per Schedule VII of the Act. Therefore, it is important for business houses to spend a portion of their profit to meet social responsibility. Hence, CSR expenses can be considered as business expenses.

Dispute with CSR expenditure from IDT standpoint

Goods and Service Tax (GST) was introduced in India in July 2017 with a vision to ensure free flow of Input Tax Credit (ITC) at every stage of the supply chain. Ever since the inception of GST, ITC has been the focus area for the government. With each passing year, the government has introduced several changes in the methodology or eligibility for availing ITC. ITC on CSR expenses has been a controversial issue since the erstwhile regime. Taxpayers in the erstwhile regime were mainly dependent upon judgment passed by various authorities for determining the eligibility of ITC on CSR expenditure, while in GST regime, the Authority for Advance Rulings has taken charge of analysing this issue from a different standpoint. The government, through this year’s Union Budget, has endeavoedred to end this issue.

Proposed amendment in the Finance Bill 2023

The first Union Budget presented in “Amrit Kaal” was intended to lay down the blueprint for India@100 through a series of reforms and amendments. Most of these reforms were for the development of the Indian Economy. However, one of the proposals is “restriction of ITC on CSR expenses” incurred for fulfilling CSR obligation by way of insertion of clause (fa) in Section 17(5) of the Central Goods and Services Tax Act, 2017 (“CGST Act”). Relevant extract of the Finance Act 2023 has been produced below for ready reference

“(fa) 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;”

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