| Mar-23-2021

GST Implications on Corporate Social Responsibility: A dilemma in Hands

In the wake of COVID-19, corporate and companies have started distributing essential commodities like face masks,  sanitizers,  food  packets,  and  have  donated  in  other  forms.  Activities  which  are  undertaken  or donations  made  to  eliminate  social  insecurity  and  COVID-19  has  been  agreed  to  fall  under  donations  in Schedule 7 as Corporate Social Responsibilities.

CSR is a sense of responsibility towards the community and environment where a company operates. Ex: activities towards promoting health care, gender equality, education. Every company, under section 135(5) of the Companies Act, is required to comply with the CSR requirements.

However, GST Implications on companies indulging in CSR Activities have been a hotbed question. There     are two sets of thoughts; one advocates that CSR enhances business sustainability and profitability of the company’s operations, and therefore, this shall be considered supply for consideration in furtherance of business. The other school of thought fosters that CSR is a donation and not a payment to an external party    in furtherance of business, and therefore, shall not be made exigible to GST.

This article discusses the pertinent issue of GST implications on CSR Activities and emphasizes the interplay  of business profitability, CSR, and GST. Further, the article concludes with some embarking suggestions that should be a new roadmap ahead.

ITC Implications of Expenses Incurred by the Operation of Law

According to Section 1  6(1) of the CGST Act, 2017 (hereinafter “the Act“) every registered person has a right to avail of the input tax credit on supplies of goods or services or both used in the course or furtherance of business. However, pursuant to Section 17(5) of the Act, ITC is not available for the supplies enlisted therein, notwithstanding Section 16(1) of the Act. It contains that the supply of goods or services used for personal consumption or goods disposed of by way of gift or free samples cannot be made eligible to ITC.

As a corollary from the above-mentioned provisions, it can be readily deduced that ITC is available for any inward  supply  which  is  used  in  the  course  or  furtherance  of  the  business  unless  specifically  excluded  by virtue of Section 17(5) of the Act.

Therefore, the scope of availability of ITC is solely dependent upon the scope of ‘course or furtherance of businesses. Unlike in the erstwhile CENVAT Credit regime, credit could have been availed of only when the supplies are covered in the definition of input, input services, or capital goods. Therefore, the scope of a tax credit is wide and extended as compared to the earlier regime.

To ascertain whether expenses incurred for CSR, the qualifier ‘in course of or furtherance of businesses has    to be fulfilled. In absence of a definition of ‘furtherance of business’, the author intends to interpret the     terms from judicial precedents, lexicons in light of CSR role in the business.

Mandatory Nature of CST and Business Purpose

Section 135 of Companies Act, 2013 mandates that every company is mandated to spend at least 2% of its net  profit  on  CSR  Activities.  Since,  the  company  may  incur  expenses  in  lieu  of  procurement  of  goods  & services, for distributions, and therefore, if ITC is not available for CSR expenses, and it shall tantamount to an additional cost on account of CSR.

There are two theories in this consideration, as mentioned above. One theory advocates that since CSR is a mandated responsibility under the Companies Act, and therefore, any non-compliance of such provisions would necessarily have implications in furtherance of business. Thus, CSR expenses must be treated as expenses incurred for inward supply in course of or furtherance of businesses. While another  theory  expounds that principle of GST shall be made applicable only if outwards supplies are taxable. Since, CSR is made free of cost, and not with the intention of profitability but to foster its commitments towards society, environment, and other measures, and therefore, expenses incurred shall not be treated in course of or furtherance of business.

Analysis:

First School of Thought

As stipulated in Section 17(2) of the Act, ITC can be claimed only if the outputs are taxable. Also, as evident from Section 17(5), ITC cannot be claimed for good lost, stolen, destroyed, written off, or disposed of by way of gift or a free sample. In the case of CSR, a company is providing outputs/services without charging any cost, and therefore, as a corollary from Section 17(2), ITC cannot be availed of on CSR Activities. In the case of CIT v. Ajax, Products Ltd.1, the Apex Court had held that there was no scope for intendment where the words used by the legislature were clear and unambiguous. Therefore, the restriction under section 17(5)(h) cannot be made applicable to the free provision of services

Also,  as  per  Section  37  of  the  Income-tax  Act,  any  expenditure  incurred  by  the  assessee  for  any  activity undertaken  for  CSR  purposes  shall  not  be  deemed  to  have  incurred  for  business  or  profession.  In  other words, it cannot be claimed as business expenditure, and therefore, shall not attain the label of social-driven expenses. By Finance Act, 2014, the Government disallowed CSR expenses as an expenditure under section 37 of Income-tax Act, 2020.

Further,  as  held  in  the  case  of  Polycab  Wires  (P.)  Ltd.  it  was  held  that  CSR  is  the  supply  of  goods  and services for free of any cost, and therefore, ITC cannot be claimed as a matter of entitlement as per Section 17(5)(h) of KGST Act, and CGST Act.

As  evident  from  the  interpretation  of  GST  provisions,  the  expenses  incurred  in  lieu  of  CSR  shall  not  be considered  in  furtherance  of  business.  However,  there  are  a  plethora  of  research  studies  which  advocates that  CSR  increases  business  profitability2,  and  increase  corporate  financial  performance.  Thus,  it  can  be implied  that  CSR  expenses  are  in  furtherance  of  business.  However,  as  derived  from  the  Government’s intentions,  CSR  expenses  are  still  treated  as  a  noble  concept  and  not  seen  from  the  lens  of  business profitability.

Second School of thought

This school of thought advocates that CSR is in the nature of mandatory business activities, as per Section 135  of  Companies  Act,  2013.  Therefore,  any  non-compliance  of  such  provisions  would  have  necessary implications,  maybe  in  the  form  of  penalty  on  the  business  operation  of  a  company  and  therefore  such activity must be considered in course of or furtherance of business. Under earlier CENVAT credit regime, in the case of Essel Propack v. Commissioner of GST & CE3, it was held that CSR expenses are not in the form of charity, as it has got a direct bearing on the business sustainability, and manufacturing activity of a company.  Further,  it  enhances  the  credit  rating  of  a  company  and  its  business  reputation  in  the  market. Therefore, the tribunal held that such expenses are incurred to win the confidence of the stakeholders and shareholders, and hence in furtherance of business.

Since the scope of ‘supply’ as defined in Section 7 of the Act includes the transactions undertaken without consideration. The author argues that CSR is an activity of supplying goods and services without any consideration, and in furtherance of business as observed from the above, and thus, must be made exigible under the GST regime and ITC shall be made available.

On the judicial frontier, the tribunal has also supported this position and reiterated that CSR is exigible to GST, as it is furtherance of business, and therefore, ITC should be made available. In the case of the Indian Institute of Corporate Affairs, the court reiterated that the amount paid by the companies  to  external  agencies for CSR Activities to undertake specified projects, would be considered as ‘Consideration’, and activities undertaken on company’s instruction or direction shall be deemed to Supply within the GST Act.

Further, CSR cannot be treated as a gift, as the delivery of the gift is made voluntarily, and therefore, cannot assume  the  character  of  gifts.  As  may  be  noticed  from  the  Gift  Tax  Act,  the  definition  of  gift  necessarily includes  any  transfer  made  voluntarily  and  without  consideration.  Since  the  activity  is  mandated  on companies, and therefore, any CSR activities cannot be termed as a gift. Thus, accordingly, CSR is not falling under the purview of Section 17(5) of the Act, thus ITC can be availed in CSR cases.

There is no empirical evidence that expenses on CSR would necessarily increase the performance of a  company. As the term ‘furtherance of business’ interpreted that an activity must be undertaken for business stability and profitability. However, it is not clear, whether CSR shall be treated in furtherance of business.

Conclusion:

In India, CSR has been seen as a noble concept that is the duty of corporate, rather than from a view of business profitability or sustainability. In a plethora of research studies and cases, courts and scholars have seen CSR as charity made for benevolent purposes. The mandate of law is implied because to  impel   companies to fulfill their social obligations as a corporate citizen of the country, and therefore, such  a  mandate is imposed. If there had not been e any mandate of law, then no company shall accept its social obligations. Thus, CSR as a concept has been traced as a social concept and should be treated as  in  furtherance of business. Therefore, no credit must be warranted in such cases.

Therefore, two different tax treatments appear to create an anomaly in the eyes of taxpayers, and therefore,     it is quintessential that a government may advent with an amendment to ensure there is the certainty of tax.  The certainty of tax is one of the principle cannons of tax, to have a better rationalization of tax. From the viewpoint of CSR activities, the Government must ensure that ITC shall be available to the Companies, for    the sole reasons – that it will encourage corporate to come forward in the unprecedented time to help the society at large, and therefore, the GST regime warrants an amendment in this regard.