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GST Considerations vis-à-vis CSR Expenditure
By Adarsh Somani and Mohammad Asif Mansoory, Economic Laws Practice
Corporate Social Responsibility (CSR) is the corporate’s way of acknowledging its responsibility towards society by contributing to the economic and social welfare of all the stakeholders. CSR has largely been viewed as a voluntary exercise and a strategic initiative that contributes positively to the brand.
Further, the Companies Act, 2013, mandated certain category of companies to spend a pre-defined percentage of their profits towards CSR obligation. This is even more relevant given the current scenario, where the entire nation is collectively fighting against the Covid-19 pandemic and businesses are being encouraged to contribute to it, by allowing such expenditure as permissible activity for CSR purposes.
The expenditure on CSR could be extended in multiple ways, illustratively such as
(a) direct monetary contribution/ donation,
(b) free distribution of goods (manufactured or purchased from third party), or
(c) undertaking construction of Hospitals, Covid Centres etc.
In this article, we attempt to discuss the GST issues where mandatory CSR obligation is satisfied through free distribution of goods.
The eligibility to avail Input Tax Credit (ITC) under GST is far wider than the erstwhile Indirect tax regime, with minimal restrictions. In terms of Section 16 of the Central Goods & Services Tax Act, 2017 (CGST Act), every registered person is entitled to avail ITC on supplies of goods or services or both ‘used in the course or furtherance of business’ with specific restrictions such as those contained in Section 17(5).
ITC on purchase of goods for free distribution
The moot query to be addressed here is whether the goods procured for discharging CSR obligation can be viewed as an activity in the course or furtherance of business. As stated above, the Companies Act, has mandated certain companies to incur expenditure on CSR and non-adherence to the same, shall lead to penal implications, both monetary and reputational. Interestingly, nowadays the Customers are also induced to buy goods/ services, when they are made aware of the company’s responsiveness towards CSR obligations. A business with an adverse status on CSR front is likely to have some negative impact.
In the erstwhile service tax regime, the Mumbai Tribunal in case of Essel Propack Ltd. enunciated that expense incurred on CSR is not a charity; it has a direct bearing on the company’s image, and it also helps to win the confidence of all the stakeholders. Further, the Karnataka High Court in the case of Millipore India Pvt. Ltd., echoed that the concept of CSR is relevant and service tax paid on expenditure incurred for complying with a statutory obligation should be eligible for ITC.
Recently, the Uttar Pradesh Authority for Advance Ruling (AAR) in the case of Dwarikesh Sugar Industries Ltd, relying up on the above two judgements held that expenditure mandatorily incurred on CSR should qualify as an activity done in furtherance of business, and therefore eligible for ITC under GST. Further, the AAR also pronounced that the restriction placed on availment of ITC under Section 17(5)(h) on goods disposed by way of ‘gifts’ is not attracted in this case. The underlying principle being that ‘gifts’ entail a voluntary act, whereas CSR is a mandatory act.
A reference to the intent of the legislature could be seen from the recent amendment to Section 17(5)(b), wherein ITC is allowed on certain expenses incurred by employers for employees, for complying with any law for the time being in force i.e. an obligatory expenditure. However, the Kerala AAR in the case of Polycab Wires Pvt Ltd, dictated a contradictory ruling where it was upheld that ITC is not available on switches, fans, cables etc. which were distributed for free to flood-affected areas as a part of CSR expenditure, by virtue of the restriction placed under Section 17(5)(h) i.e. gifts.
Moreover, the GST law does not provide for any specific restriction on availing ITC on CSR expenditure as compared to the Income Tax law, where CSR expenditure is explicitly excluded while computing income from business and profession. Therefore, based on the facts of the case, a position may be adopted that ITC should be available on expenditure mandatorily incurred towards CSR.
Impact on free distribution – outward supply
‘Supply’ under GST has been defined in a rather wide manner to include all forms of supply such as sale, transfer, barter, exchange etc made for a consideration in the course or furtherance of business. Further, activities specified in Schedule-I are to be treated as a supply, even if made without consideration. Since CSR encompasses supply of goods to beneficiaries without any consideration, it becomes imperative to examine whether free distribution of goods under CSR merits classification under Schedule-I to the CGST Act, which inter alia includes ‘Permanent transfer or disposal of business assets where input tax credit has been availed on such assets’.
The term ‘business assets’ has not been defined under the CGST Act. Thus, on application of rules of interpretation, it appears that business assets are of a rather wide connotation and capable of including capital goods, finished goods, inputs etc within its ambit. Therefore, goods procured for discharging CSR obligation may fall within the scope of Schedule-I, upon free distribution, i.e. deemed to be a supply liable for payment of GST. The valuation mechanism under GST law prescribes different methodologies for determining the value of supply which have to be applied in a sequential manner starting with ‘open market value’. In this case, open market value can be determined basis the actual purchase price itself.
It is pertinent to note that one of the key criteria for activation of Schedule-I is that ITC must have been availed on business assets which are permanently transferred or disposed. Conversely put, if ITC is not availed on goods procured for discharging CSR obligation, consequential categorization of free distribution as a supply and payment of GST thereof may not be warranted.
Accordingly, if ITC is availed on goods procured for discharging CSR obligation; free distribution thereof may trigger payment of GST in view of Schedule-I, although the net impact in the hands of the businesses will be ‘zero’ as ITC and output liability will be of identical value.
Services from third parties to fulfil CSR commitments
In contrast to ‘goods’, the CGST Act neither imposes a restriction such as Section 17(5)(h) on availment of ITC nor extends the deemed supply provisions contained under Schedule-I; in case of ‘services’. Therefore, it seems that ITC may be availed on services procured for fulfilling CSR obligations without any limitations.
Expenditure through trusts and non-profit organizations is a modern way of addressing CSR obligations. The activities of such trusts/ organizations essentially blend the product offerings with a social cause in a manner, where the brand is highlighted in good earnest. In such cases, it is often argued that ITC on expenditure incurred i.e. charges paid to the third party is eligible for ITC owing to the marketing element. While the proposition may hold good for ITC purposes under the GST law; does too much harp on the marketing quotient jeopardizes recognition of spends towards CSR itself, remains to be seen. A careful approach is, therefore, warranted.
Circular offering futile clarifications
Circular No. 92/11/2019-GST dated March 7, 2019, offering clarifications on various sales promotion schemes, inter alia touched upon the aspect of availment of ITC on free samples. A parallel to the same situation can be drawn to free distribution of goods under CSR. The Circular at one hand provides that samples supplied free of cost do not qualify as a supply, except where the activity falls under Schedule-I. Whereas, on the other hand, it states that, where the activity of free distribution of samples is considered as a supply in terms of Schedule-I, ITC can be availed on the same.
The above, neither clarifies whether free distribution of samples qualifies as a supply under Schedule-I nor provides a guidance with regards to availment of ITC on free samples. In fact, the Circular provides that ITC can be availed if the transaction qualifies as a supply under Schedule-I, whereas, Schedule-I is applicable only in cases where ITC is availed.
It will be interesting to see how the tax authorities decode the Circular and the possibility of the authorities adopting a position that firstly ITC should be availed on samples and secondly, GST must be paid at the time of free distribution; cannot be ruled out. Such a view may prove to be lethal in cases where the statutory time limit to avail ITC has already expired and the businesses are asked to pay GST on free supply.
Availment of ITC may lead to deficit in CSR spend
The requirement under the Companies Act, is to ‘spend’ a pre-defined percentage of profits towards CSR activities. Therefore, where ITC is availed on goods without consequential payout in view of Schedule-I; a view may emerge that to the extent of ITC availed on goods procured for discharging CSR obligations, the same is not spent or actually gone out of the pockets of the Corporate.
Accordingly, the deficit in CSR expenditure due to availment of ITC needs to be adequately compensated by contributing additionally towards CSR activities, so that the minimum contribution requirement is satisfied.
CSR has received increased attention in the recent past as a means for sustainable development and an impetus for inclusive growth of all. In these testing times, it is crucial that the Corporates who are contributing towards CSR obligations are motivated to do so, without any hassles from a tax perspective. The least that CBIC could do, is that it should suo moto intervene and issue requisite clarifications, to clear the incongruity.
In view of the uncertainty, it may seem to be pointless to avail ITC on goods procured for discharging CSR obligation without any surety on its eligibility and with the likelihood of payment of GST as a deemed supply at the time of free distribution. Further, in case where clutches of Schedule-I are escaped, there is a possibility that the provisions of Companies Act could be invoked to direct additional spending, to fulfil the shortfall in the CSR expenditure. Lastly, where the tax authorities adopt a view that ITC should be availed and GST must be paid on supply at the time of free distribution, it may lead to undue litigation and an undesirable compliance burden, which should be completely avoidable.
Therefore, it is recommended, that professional guidance must be sought before adopting/ for reviewing GST positions on the CSR expenditure considering the ambiguity and the possible harassment in the form of unwarranted litigation.
The authors are part of Economic Laws Practice (ELP), a full-service law firm that was recognised as the Top Law Firm in Forbes India’s Legal Power List 2020 and ranked as Top Tier Firm 2021 by The Legal 500 Asia Pacific. Adarsh Somani (see pic, right) is Partner at ELP and part of the firm’s tax practice. He assists several multinational and domestic companies in deploying tax efficient value chains in business. Mohammad Asif Mansoory (left) is an Associate Director in the Tax Practice of ELP and focuses on indirect taxes. He has assisted clients and associations across sectors in their transition into GST, including advising them on complications arising post implementation of GST and customs matters.
Views of the authors are personal and do not necessarily represent the website’s views.
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The CSR Journal Team