Input tax credits cannot be claimed on goods or services used or planned to be utilised for Corporate Social Responsibility (CSR) initiatives, according to the Union Budget 2023. The amendments in the Central GST Act have been brought through the Finance Bill, 2023.
The Finance Bill 2023 proposes to amend section 17 of the CGST Act to prohibit companies from claiming input tax credit (ITC) on goods or services used for corporate social responsibility (CSR) activities, as outlined in Section 135 of the Companies Act, 2013. While companies will still be required to provide for CSR expenses in their budgets, they will not need to deposit any ITC availed since the implementation of GST.
According to a senior Finance Ministry official, CSR expenses are not intended to promote business but to benefit society, and companies do not use CSR funds for activities related to their business. However, there have been conflicting rulings on this issue by the Authority for Advance Rulings (AAR). The official also noted that the Income Tax Act does not allow deductions for CSR expenses, so there is no reason for special treatment under GST.
Input Tax Credit under GST on Corporate Social Responsibility
The ability to claim credit for taxes paid on purchases is a fundamental aspect of GST, ensuring that tax is only applied to value added at each stage of the supply chain and avoiding tax on tax. However, the issue of claiming credit for GST paid on goods and services procured for meeting Corporate Social Responsibility (CSR) obligations has been a point of confusion, with varying decisions from different advanced ruling authorities.
KPMG in India Partner, Indirect Tax, Abhishek Jain said the Finance Bill proposes to restrict input tax credit paid on goods and services used for CSR activities. “While this would be slightly disappointing for the industry, this change would clear the air on the issue, which was ambiguous and was subject to contrary advance rulings,” Jain said.
Advance rulings related to GST on CSR
Different advance ruling authorities in Uttar Pradesh, Telangana, Gujarat, and Kerala have issued conflicting rulings on the issue of whether taxes paid as part of Corporate Social Responsibility (CSR) activities qualify as “in the course or furtherance of his business”, which is the criteria for claiming credit for taxes paid on purchases. The Telangana State Authority for Advance Ruling and the Authority for Advance Ruling in Uttar Pradesh have ruled that GST on inputs procured for CSR is eligible for credit. In contrast, the authorities in Gujarat and Kerala have ruled the opposite, according to orders available in the public domain.
Impact of GST on CSR spending
The decision to deny input tax credit to businesses on Corporate Social Responsibility (CSR) in the Central Goods and Services Tax (CGST) Act will have a significant impact on large companies such as Reliance Industries, Tata Consultancy Services (TCS), Tata Sons, HDFC Bank Ltd., and Oil and Natural Gas Corporation (ONGC), which are the highest spenders on CSR as per official data. In FY22, Reliance Industries spent ₹1186 crores on CSR, while HDFC Bank Ltd. spent ₹736 crores followed by TCS with a spending of ₹727 crores, and ONGC Ltd. spent ₹472 crores. Overall, Indian companies spent more than ₹25,000 crores on CSR in FY22.
CSR Law in India and other CSR amendments
India became the first country in the world to make CSR compulsory. In India, Corporate Social Responsibility has been made mandatory through provisions under Section 135 of the Companies Act, 2013.
According to the law, a company needs to spend at least 2% of its average net profit made during the three immediately preceding financial years on CSR activities.
The CSR law, which is popularly known as the CSR mandate, which came into effect in April 2014, applies to every company registered under the Companies Act, 2013, and any other previous companies’ law qualifying following conditions.
– Having a net worth of rupees five hundred crores or more, or
– Having a turnover of rupees one thousand crores or more, or
– Having a net profit of rupees five crores or more during a financial year.
Spending on CSR by the industry has seen a significant increase in recent years, up from over ₹14,300 crores spent in FY17. In January 2021, the government introduced a penalty provision for companies that fail to meet their CSR spending obligations. It allowed businesses to spend more than their obligation, which could be adjusted against their future spending requirement.
Reaction of corporates on levy of GST on CSR spends
Corporations are required to allocate a certain portion of their profits towards CSR spending, regardless of whether they receive tax credits for it or not. However, obtaining input tax credit allows businesses to offset a portion of their GST liability on their sales. Historically, most businesses have believed that levying a Goods and Services Tax (GST) on socially good initiatives is unjustified.
AMRG & Associates Partner Priyanka Sachdeva has expressed her disappointment stating that the disallowance of input tax credit related to CSR activities is a wrong step.
“It would have been better if the government would have dealt with few major issues like input tax credit, providing relief to recipients who pay tax to the supplier but they do not deposit the tax,” Sachdeva said.
