ITC on CSR Expenses
Corporate Social Responsibility (CSR) implies a concept, whereby companies decide voluntarily to contribute to a better society and a cleaner environment – a concept, whereby the companies integrate social and other useful concerns in their business operations for the betterment of their stakeholders and society in general in a voluntary way.
The question of whether ITC can be claimed by businesses on CSR expenditure under the GST regime has been a contentious issue for quite some time now. This debate gains significance due to the mandatory nature of CSR activities as stipulated in Section 135 of the Companies Act.
A new clause (fa) is inserted after section 17(5)(f) of the Central Goods and Services Tax (CGST) Act vide Finance Act 2023 amendment specified the list of items for which ITC (Input Tax Credit) is Blocked or ineligible. As per Section 17(5) (fa)of CGST Act, ITC is Blocked for goods or services or both received by a taxable person, which is 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.
Central board of direct taxation(CBDT) vides notification No. 28/2023 dated 31.07. 2023 specified that the amendment proposed in the Finance Act 2023 for insertion of clause (fa) in Section 17(5) of CGST Act shall come into force with effect from. 01 October 2023.
This effective date implies that businesses will need to comply with the new provision and refrain from claiming ITC on CSR expenditures from 1st October 2023 onwards. With the insertion of this new clause, the government has explicitly stated that ITC on goods or services used for CSR activities will be ineligible. This amendment aims to provide clarity on the matter and establish a consistent standpoint regarding the availability of ITC on CSR expenditure.
Now question is whether companies can claim ITC on CSR expenses incurred prior to the date of notification of the amendment, i.e., before 1st October 2023. As the amendment is prospective in nature,the stand to be taken prior to 1st Oct 2023 seems contentious regarding the eligibility of ITC on CSR expenditures.
The blocked ITC for CSR activities reinforces the view that CSR expenses are distinct from regular business expenditures and should not be considered eligible for claiming input tax credits (ITC).
To seek clarity on this issue, taxpayers have approached the Advance Ruling Authorities (AAR) for guidance and a definitive tax position. However, the rulings from different AARs have been divergent, further complicating the matter.
Expenses incurred towards CSR is in order to comply with the requirements under the Companies Act, 2013 and qualify as being incurred in the course of business and therefore is eligible for ITC in terms of Sec 16 – Dwarikesh Sugar Industries Ltd, AAR UP.
In contrast, the same AAR in the case of SHRIRAM PISTONS AND RINGS LIMITED held that ITC on CSR expenses is not allowed.
Additionally, the Kerala AAR, in the case of Polycab Wires (P.) Ltd., disallowed ITC on CSR activities, treating them as gifts.CSR activities undertaken shall exclude activities in pursuance of normal course of business and therefore not eligible for ITC – Adama India Pvt Ltd, AAR Gujarat .
