Implication of GST on CSR Expenses

Implication of GST on CSR Expenses

Introduction to Corporate Social Responsibility (CSR)

In the legal framework, Corporates on which section 135 of the Companies Act, 2013 is applicable are required toundertake their Corporate Social Responsibilities in accordance with the Schedule VII of said act, which specifies list of activities that may be included by the Corporates in their CSR activities.

Possible Modes of discharging Corporate Social Responsibility

The various modes which may be adopted by any corporate to discharge its Corporate Social Responsibility (CSR) u/s 135 of Companies Act, 2013 read with Schedule VII are depicted below:

Direct Contributions to various funds such as Swatch Bharat Kosh, PM Cares Fund, State Disaster Management Fund, Clean Ganga Fund etc. Providing funds to any registered trust or society, established by Government, or to a company registered u/s 8 of Companies Act, 2013 engaged in implementing CSR projects. Discharging the CSR related activities specified in Schedule VII by providing manufactured/traded goods or services on its own to the beneficiaries.

Let us analyze the implications under GST Law for all the three above mentioned modes of discharging CSR.

1. Direct Contributions to various funds such as Swatch Bharat Kosh, PM Cares Fund etc.

1.1 The Contributions to such funds are made in form of monetary donations. GST Law shall not be applicable on such monetary contributions as section 2(52) of CGST Act, 2017 excludes Money from the definition of Goods. Further, it is well settled prepositions that Donations, having no consideration, cannot be classified as Supply u/s 7 of CGST Act, 2017.

2. Providing funds to any registered trust or society or to a company registered u/s 8 of Companies Act, 2013.

2.1 CSR activities under this scenario are usually provided by the funds recipient trust/society under an MOU entered into between it and funds provider corporate. By implementing such an MOU, the funds providing corporate discharge its Corporate Social responsibility (CSR).

2.2 Although the funds providing corporate is not directly performing any CSR activity and such activities are actually provided by the funds receiving trust/society to the ultimate beneficiaries, but still funds receiving trust/society may need to charge GST on the funds received by it.

2.3 The above view has been given by the Authority for Advance Ruling, New Delhi in the case of Indian Institute of Corporate Affairs [2019] 29 GSTL 78 (AAR – New Delhi) after analyzing the various clauses of MOU between Institute of Corporate Affairs (IICL/funds receiving society) and Agriculture Insurance Company of India Ltd. (AICL/funds providing corporate). It has been held that none of the Entries of Notification No. 12/2017-Central Tax (Rate) dated 28-6-2017 provides for exemption from tax in respect of such supplies. Even if it is assumed that services supplied by the IICL are not received by AICL but are received by the beneficiaries, the amount paid by AICL to the IICL is still covered in the definition of ‘consideration’ paid for the said supply of goods or services by the IICL in terms of the section 2(31)(aand is covered in the definition of supply given under section 7(1).

2.4 Hence it can be concluded that the terms and clauses of MOU need careful drafting as they would play a decisive role in such cases. Any direct link or nexus between the amount paid and the supply of taxable service, details of the beneficiaries, guidelines to ensure that such services are delivered to them and other similar terms should be avoided to give the funds shape of donation or grant.

3. Discharging the CSR related activities by providing manufactured/traded goods or services directly to the beneficiaries.

3.1 Under this mode, the Corporate may provide own manufactured or purchased goods such as masks, sanitizers, PPE, food products etc. to the beneficiaries to discharge its Corporate Social Responsibility. Alternatively, services such as providing temporary shelter, COVID-19 education or awareness programme etc. may also be provided by the Corporate to discharge its Corporate Social Responsibility. As all such goods and/or services are provided without charging any monetary or non-monetary Consideration, hence admissibility of Input Tax Credit (ITC) on expenses incurred for discharging CSR need to be analyzed.

3.2 Subject to section 17(5) of CGST Act, 2017, under section 16(1) every registered person shall be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business.

3.3 The phrase ‘in the course or furtherance of’ appearing in section 16(1) is not defined under CGST Act, 2017. Dictionary meaning of ‘in course of’ can be understood as ‘in the process or progress of or in the midst’. The phrase ‘in course of’ has been similarly explained by the United States Court of Customs and Patent Appeals in the case of Fitch v. Atomic Energy Commission, 491 F.2d 1392 (C.C.P.A. 1974). Further, Dictionary meaning of word ‘Furtherance’ can be understood as ‘Advancement or promotion or process of helping something to develop’. Also, Para 3.10 of the Explanatory Memorandum relating to the A New Tax System (Goods and Services Tax) Bill 1998, Australia says that ‘In the course or furtherance’ is not defined, but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise.” Hence, it can be concluded that the phrase ‘in the course or furtherance of’ has a wider coverage.

3.4 However, ‘Business’ is defined u/s 2(17) of CGST Act, 2017. Clause (b) of said definition includes any activity or transaction in connection with or incidental or ancillary to trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity within the definition of ‘Business’. Hence the clause (b) of section 2(17) of CGST Act, 2017 gives wide meaning to the term ‘Business’. This view has been expressed by Honorable Supreme Court in the case of Doypack Systems P. Ltd. 1988 (36) ELT 201 (SC) and Mumbai High Court in the case of Coca Cola India P. Ltd. 2009 (15) STR 657 (Mum.).

3.5 Expenses incurred to discharge Corporate Social Responsibility (CSR) are in the course or furtherance of the business of the Corporates due to following points:

3.5.1 Statutory requirement with penal provisions (proposed) u/s 135 of Companies Act, 2013

3.5.2 Ethical and social responsibility towards stakeholders.

3.5.3 Smooth functioning for long period.

3.5.4 Improving public image & Increased media visibility.

3.5.5 Enhancing brand value & Stand out in competition.

3.5.6 Boosts employee morale.

3.5.7 Ensure additional and secure raw material supply.

3.5.8 Improvement in credit ratings.

3.6 Hence, ITC of expenses incurred on discharging Corporate Social Responsibility are in the course or furtherance of the business, therefore eligible u/s 16(1) of CGST Act, 2017. Such expenses may be incurred on account of manufacturing goods or purchasing goods or providing services. However, all such expenses need to pass the test of section 17(5) of CGST Act, 2017.

3.7 Clause (h) of section 17(5) of CGST Act, 2017 provides that input tax credit shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Definition of input tax u/s 2(62) of CGST Act, 2017 includes tax on goods or services or both.

3.8 Before analyzing the clause (h) of section 17(5) of CGST Act, 2017, it is important to understand the meaning of phrase ‘in respect of‘. The interpretation of the term ‘in respect of’ fell on the Honorable Supreme Court in the case of State of Madras v. M/s. Swastik Tobacco Factory 1966 AIR 1000 (SC). Question before the Hon. Supreme Court was whether the words ‘in respect of goods sold’ shall include the raw material used in manufacture of goods sold by the dealer. Relying upon various English decisions, it was argued by the respondent that the words ‘in respect of’ meant ‘attributable’ and, therefore, the argument proceeded, the excise duty paid on the raw tobacco, though it was not paid on the goods sold by the respondent, was attributable to the said goods sold. However, the Hon. Supreme Court held that Indian tax laws have used the expression ‘in respect of” as synonymous with the expression ‘on’. Hence, it was held that the words ‘in respect of goods’ mean only that goods and not raw materials which go in manufacture of those goods.

3.9 Sec. 17(5)(h) has also used the same phrase. Hence, Input tax credit is not allowed only in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Inputs, input services or capital goods used in/for manufacture of free samples cannot be said to be goods/services used ‘in respect of’ goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples and, hence, restriction u/s 17(5)(h) shall not apply. Further, there is no restriction for credit of GST charged on goods or services in respect of Services provided under CSR.

3.10 Now, we are clear that section 17(5)(h) of CGST Act, 2017 do not covers restriction of ITC on raw materials/goods or services used in manufactured goods, which are given for discharging CSR by the Corporates. However, purchased Goods given under CSR by the Corporate may face restriction prescribed under section 17(5)(h). Important point to consider is that Goods given to discharge CSR are neither said to be lost or destroyed or stolen or written off etc. They are given intentionally with a motive by the Corporate to discharge its CSR.

3.11 The goods given by the Corporate to discharge CSR cannot be said to be disposed of by way of gift or free samples. In case of a Gift, Supply must be made without any contractual obligation. If any supply is made under a contractual obligation it cannot be termed as a ‘gift’. Supply must be made without any consideration in money or money’s worth. Hence, supplies made out of love and affection or such other non-legal considerations can only be termed as ‘gifts’. The principle is well established by Apex Court in the case of Sonia Bhatia v. State of UP [1981] 2 SCC 585.

3.12 Hence, it can be finally concluded that, looking to the legal and moral necessities of CSR, ITC on CSR expenses should be allowed u/s 16(1). Manufactured goods given to discharge CSR or any Services provided under CSR are not hit by the restriction given u/s 17(5)(h). However, goods purchased and given to discharge CSR may face blockage of ITC u/s 17(5)(h) of CGST Act, 2017.

Discussions over various Judicial Pronouncements and Advance Rulings

4.1 Honorable CESTAT, Mumbai in the case of Essel Propack Ltd. (2018-VIL-61-CESTAT-MUM-ST) has held that CSR Activities are input service for the purpose of availing CENVAT Credit after considering the mandatory requirement of CSR under Companies Act, 2013 and other direct & indirect advantages which the Corporate derives by discharging CSR. Reference can also be drawn to the judgments of Honorable Madras High Court in the case of Raane TRW Steering Systems Ltd. [2015] 57 131 (Madras) and Honorable Karnataka High Court in the case of Millipore India P Ltd. [2012] 34 STT 86 (Karnataka).

4.2 Recently, Authority on Advance Ruling, Kerala in the case of Polycab Wires Pvt. Ltd. [2019] 104 36 (AAR – KERALA) has not allowed ITC u/s 17(5)(h) as the electrical goods were distributed on free basis without collecting money.

4.3 Appellate Authority on Advance Ruling, Odisha in the case of National Aluminum Co. Ltd. [2019] 102 371 (AAAR – Odisha) has affirmed an Advance Ruling with contradictory remarks. AAAR held that ruling of the AAR that services availed in relation to plantation and gardening within the plant area including mining area and the premises of other business establishments will qualify for input tax credit is found to be correct and added that “Creation and maintenance of green area/zone inside plant/mining/office premises is a business necessity for controlling pollution as well as atmospheric temperature. It is also a requirement for preventing soil erosion. This is also mandated in various laws under which the appellant conducts its business such as the Forest Conservation Act, the Environment Protection Act, etc. Therefore, such activities are integral to the business activity of the appellant and can be treated as activities in course or furtherance of its business”. Although in the same ruling, AAAR has not allowed ITC on plantation done outside business/plant premises for discharging CSR, being not integrally related to business but welfare activities.

Output GST on goods & services provided to discharge CSR

5.1 On the basis of aforesaid, it can be said that the ITC on the CSR expenses should be allowed and the same could not be restricted under section 17(5)(h). Even if this view sustains, the GST is not going to leave soon and would hit you from the output side, as the same can be regarded as the ‘Supply’ under Section 7(1)(a) where non-monetary benefits also such as brand value enhancement, media visibility, improved ratings etc. may be argued as Consideration to the Corporates.

5.2 Alternatively, the same would be regarded as the ‘Supply’ by virtue of Entry1 to Schedule-I to the CGST Act, 2017 read with section 7(1)(c) of the CGST Act, 2017. Although the term Business Assets is not defined under CGST Act, 2017 but its meaning can be understood based on judgment of Honorable Supreme Court in the case of Sultan Brothers (P.) Ltd. v. CIT [1964] 51 ITR 353 (SC) which defines that “Commercial asset is an asset used in a business and nothing else”. Hence, Samples, being part of manufactured or purchased stock, are therefore business assets.

5.3 The phrase ‘on such assets‘ given at the end of Entry 1 to Schedule-I of CGST Act, 2017 can be read as ‘with reference to’. Entry 1 to Schedule I only covers cases where input tax credit has been availed ‘on’ such assets and not its component parts. Hence, this also supports our view that when manufactured samples are given the same are not covered under said entry as input tax credit has not been availed on such manufactured samples but on its component parts (i.e., inputs).

5.4 Hence, it can be concluded that providing manufactured sample goods for discharging CSR by a Corporate shall not be deemed as Supply without consideration under Schedule – I. However, traded/purchased sample goods for discharging CSR by a Corporate may be treated as deemed Supply under Schedule-I.

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