Introduction
India is the first country to implement corporate social responsibility (in short referred to as “CSR”) mandated under the Companies Act, 20131. As per Section 135 of the said Act,
“Every company having a net worth of rupees five hundred crores or more, or turnover ofrupees one thousand crore or more or a net profit of rupees five crores or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director”.2
The basis will be an average net profit made during three immediately preceding financial years. CSR is a sense of responsibility of voluntary contribution by various companies towards a better society and a cleaner environment where a company operates in the form of projects or programmes aiming the same. The company qualifying the abovementioned requirement for CSR has to spend at least 2% of its average net profit earned during the immediately preceding three financial years on CSR activities; which could be carried out in different forms. For example, providing education, promoting gender equality, healthcare or sanitation activities, projects related to rural development, contribution towards the protection of environment or to PM Cares Fund, relief activities during some disaster, etc. A specific example could be a contribution by way of cash donations towards the corpus of a charitable trust or undertaking any project activity through its unit or group entity or may undertake such activity through non-governmental organisations (NGOs).3
The Companies (Corporate Social Responsibility Policy) Amendment Rules, 20214 w.e.f. 22-1-2021 has implemented provisions of the 2019 Amendment to the Companies Act, 20135, to study an interplay between the Companies Act, 2013 as amended Central Goods and Services (CGST) Act, 20176 7 which will show that CSR is mandatory and failure to which can attract the wrath of penalties. Mainly the changes include the mandatory requirement to disclose CSR projects and activities and CSR Committee’s composition on their website and if failed to spend 2% in CSR then it should be disclosed in the report with the appropriate reason and in a scenario where the unspent amount if not related to “ongoing project” then it should be transferred to government’s notified fund. The penal action against the company could be to pay twice the amount which has to be transferred by the company to the fund specified in Schedule 78 or the unspent CSR Account, as the case may be, or 1 crore rupees, whichever is less; and, every officer in default shall be liable to a penalty of ⅒ of the amount required to be transferred by the company to such fund specified in Schedule 7, or the unspent CSR account, as the case may be, or two lakh rupees, whichever is less.
The input tax credit (in short referred to as “ITC”) is available to the supplier for the inputs, input services, and capital goods used to supply goods or services or both as part of such offers. The provision for availing of ITC is provided under Section 16 of the CGST Act, 2017 which provides that one would 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”.9 The eligibility is provided under various limbs of Section 16 of the Act, per se, however a concept of blocked credit is provided simultaneously in Section 17(5)(h) of the Act,10 that ITC shall not be available in respect of goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. Further, Section 17(5)(g) forbids ITC on goods or services procured for personal consumption.
Applicability of CSR and ITC
Provision of GST law does not specifically provide any provision for the taxability of goods or services provided by the companies as part of CSR activity. Cash donations, for example, donations given by cash, cheque or through electronic transfer of money or even the donations in kind (giving away goods or services) made voluntarily or gratuitously, cannot be construed as supply under GST as it is an activity without any quid pro quo. The contributions so made without any benefit in return cannot be treated as a consideration against any supply (in case of cash donations) or supply for consideration (in case of donations in kind) since there is no consideration received for giving such in-kind donations. Further, money is excluded from the definition of goods and services and hence, cash donations are not subject to GST.
In the case of corporate social responsibility activities, a company is providing outputs/output services free of cost. Thus, by taking into consideration the definition of taxable supplies and provisions of Section 17(2), input credit cannot be availed on CSR activities. Additionally, even according to Section 37 of the Income Tax Act, 196111, any expenditure incurred by the assessee with regards to CSR activities cannot be deemed by the assessee for business or profession.12 Thus, it cannot be claimed as business expenditure. If this is not a business expenditure, then ITC cannot be claimed on such spending and thus resultant in tantamount to an additional cost on account of CSR.
About this, two schools of thought prevail, first advocates that since CSR is a responsibility that is mandatory under the Companies Act, and therefore, any non-compliance of such provisions would necessarily have implications in furtherance of business. Therefore, CSR expenses must be treated as expenses incurred for inward supply in course of or furtherance of businesses. While on the other hand, the second theory explicates that the principle of GST shall be made applicable only if outward supplies are taxable. Since, CSR is made free of cost, and not with the intention of profitability but to foster its commitments towards the society, environment, and other measures, and hence, expenses incurred shall not be treated in course of or furtherance of business.
In Polycab Wires (P.) Ltd., In re,13 where the applicant, who is a dealer in electrical goods, had supplied electrical items to Kerala State Electricity Board (KSEB) through its distributors spread across the State in connection with reinstating connectivity in the flood-ridden areas as part of the “mission reconnect” “free of cost”. In addition to this supply to KSEB, the applicant had distributed electrical items like switches, fans, cables, etc. to flood-affected people under CSR expenses on a free basis without collecting any money. In the invoice so issued, the distributor had valued the goods for tax and the value was shown as 100% discount. Advance ruling sought that “determination of GST liability for goods provided free of any cost by the distributors of the applicant to KSEB for reinstating connectivity in flood-ridden areas; and admissibility of input tax credit concerning such goods. Thus, according to the applicability of Section 17(5)(h) of the KSGST Act, and CGST Act on CSR expenses, ITC cannot be claimed as a matter of entitlement”.
As evident from the interpretation of GST provisions, the expenses incurred in place of CSR shall not be considered in “furtherance of business”. However, there is an ample number of research studies that advocate that CSR increases business profitability, 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.
The second school of thought advocates that the ITC is available on CSR activities because they are incurred in the course or furtherance of business. CSR activities have a high impact on the image of the company and are also mandatory as per the provisions of the Companies Act, 2013. It enhances the reputation of the company and thus, forms the goodwill of the company. Therefore, it can be ascertained that corporate social responsibility activities are incurred in the course or furtherance of business. So, ITC can be claimed for such events
In Essel Propack Ltd. v. Commr. of CGST14, where Essel Propack Ltd. manufactures multilayer plastic laminates and is subjected to Central Value Added Tax (CENVAT). An audit was shown in the factory and it was found that the CENVAT credit of service tax is amounting to Rs 12,12,772 which was availed towards such company’s commitment to corporate social responsibility and the audit stated the same to be inadmissible. The appellant had made payment to a charitable trust for imparting training to students of an underprivileged section of society in the discharge of corporate social responsibility. It treated this payment towards CSR under the definition of input services. According to Rule 2(l) of the Cenvat Credit Rules, 2004 which has defined input services and that is for the manufacture of an assessee final product. The appellant argued that the said expenditure was incurred by the company within the definition of the concerned rule. Because through this training program students learnt the nature of the job that made them eligible to become future workers in factories. The appellant contends that it had engaged youth from the lower strata of the society in its factory to provide them on the floor exposure to the production activities of the company and in so doing, it has engaged them in preparation of data sheet, updating production logbook, preventive maintenance of the machine and assistance in the production operation as well as the transfer of raw materials, etc. So the same is counted within the manufacturing activities besides the fact that the purpose was to discharge CSR obligations.
A representation has been received seeking clarification as to whether donations and grants-in-aid received from different sources by a charitable foundation imparting free livelihood training to the poor and marginalised youth, will be treated as “consideration” received for such training and subjected to service tax under “Commercial Training or Coaching Service”. The important point here is regarding the presence or absence of a link between “consideration” and taxable service. It is a settled legal position that unless the link or nexus between the amount and the taxable activity can be established, the amount cannot be subjected to service tax.15 Between the provider of donation/grant and the trainee, there is no relationship other than universal humanitarian interest. In such a situation, service tax is not leviable, since the donation or grant-in-aid is not linked to a specific trainee or training.
The appellant argued that the concept of business is not stagnant and “over the period”, the expression consists of complete care and concern for the society at large and the people of the locality in which business is located in particular for which the term activities relating to business is of wider ramification and corporate social responsibility is within its ambit that would cover Rule 2(1) of the Cenvat Credit Rules for which he prays for purposive interpretation to be imported to the rule governing Cenvat credit. Whereas the Department argued that there was no correlation of input services with the business activity of the appellant since CSR activities are welfare activities and not pertinent to business/production-related activities. That the service of imparting training has been provided by the trust to the students of the weaker section of society and not by the appellant company itself and therefore there was no service provided by the Trust against which Cenvat credit is claimed by the appellant.
It was held that:
6.4. … CSR is not a charity anymore since it has got a direct bearing on the manufacturing activity of the company which is largely dependent on the smooth supply of raw materials even from a remote location or tribal belts (that requires no resistance in the supply chain from the community) and the same also augments the credit rating of the company as well as its standing in the corporate world.16
Section 7 of the CGST Act17 defines the scope of “supply”, which contains the transactions undertaken without consideration. It should be argued that CSR is an activity that indulges the supply of goods and services without any consideration, and in furtherance of business as observed from the above, and thus, must not be made eligible under the GST regime and ITC shall be made available. Moreover, on the judicial frontier, the Tribunal has also supported this position and reiterated that CSR is eligible to GST, as it is furtherance of business, and therefore, ITC should be made available. In Indian Institute of Corporate Affairs, In re AAR-Delhi18, 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, the Court held that:
“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 Act19, 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 shows that expenses on CSR would necessarily increase the performance of a company. As the term “furtherance of businesses” is 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.
Applicability of ITC on Covid-19 supplies
Now, as the country is facing unprecedented circumstances set by Covid-19 Pandemic and in such time, we have encountered an end number of companies which have been providing Covid-19 related equipments like oximeters, PPE kits, sanitisers, medicines, oxygen canisters, etc. to the employees who are working at their home to ensure their well-being as they were workforce which was working from home. As these goods are not procured for use in office premises of taxpayers, it may be comprehended by the tax officers that taxpayers are not eligible to avail ITC on such procurements under Section 17(5)(g) as these are used for personal consumption of employees. Thus, an exemption from customs under Notification No. 32/2021-Customs dated 31-5-2021,20 or Ad hoc Exemption Order No. 4/2021-Customs dated 3-5-2021,21 for extending exemption from integrated goods and services tax (IGST) on import of Covid-19 related equipment on payment of considerations but based on a certain situation, certain taxpayers may not be able to fulfil the said procedural conditions and end up paying IGST on such procurements.
Afterwards reply was sought from key GST Officials and Group of Ministers through the representation made by National Association of Software and Service Companies (NASSCOM) to clarify the eligibility of ITC on Covid-19 related procurements. Thus in the further notification, the clarification was sought that “all amount spend by taxpayers on Covid 19-related gear like PPE kits, oximeters, medicines towards ensuring the well-being of employees/their family should not be construed as personal consumption under Section 17(5)(g) of the CGST Act, rather it would be eligible for credit in terms of Section 16 of the CGST Act, as the amount as CSR was spent for providing relief to people suffering from Covid-19 Pandemic or giveaways provided to employees to ensure their safety”.22
The mechanism of ITC and blocked credit concerning CSR can be understood from the standpoint of business. The expression business requires no discussion as it is already defined under Section 2(17)(b) of the CGST Act23 and it has to be seen from the framework of supply as defined under Section 7 of the Act. The three-way test for ITC on CSR can be summarised that firstly, the moment the test of business of rending taxable supply is passed, one needs to see the eligibility and compliances under Section 16 of the Act, per se. Secondly, on having crossed the first barrier, the second test would be passing the blocked credit under Section 17(5)(h) of the Act. Thirdly, to get rid of the clutches of blocked credit, one needs to see if any activity say CSR is mandated by law, if the answer is yes, then it will be said to have passed the third test to make the ITC as an accrued and vested right under the ecosystem of GST.
The outbreak of the deadly Covid-19 pandemic created an abnormal situation in the entire world. The need for medical and health resources increased exponentially and in such circumstances, even the Government witnessed shortages in supplying resources to normalise the health situations. In such crucial times, many corporate houses and companies entered into the realm and extended their support by providing medical resources and monetary contributions. By extending such support, many companies fulfilled their social responsibility of CSR. However, the legal position regarding the eligibility of companies to avail ITC for such activities is still ambiguous and the confusion lies between the fact that whether these companies have the option to avail ITC or bear the additional burden created thereof.
As per the current GST Rules, the key requirement to avail ITC on goods or services is that it should be utilised “in the course or furtherance of business”. Courts in some instances have interpreted this as “anything done towards assisting or promoting the interests of a business”. Thus, any activity done towards the purpose of earning profit shall be in the ambit of “in the course or furtherance of business”. Considering the voluntary and philanthropic activities of the companies, Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Mumbai allowed the companies to avail CENVAT credit of service tax paid for carrying out CSR. It opined that CSR being a mandatory social obligation for both public and private companies, must be deemed as a business activity. Thus, the view that companies may avail ITC on goods supplied as an act of fulfilling their CSR obligations and is in the course or furtherance of business can be considered valid. However, the GST Rules allow ITC on the supply of goods that are used in the course or furtherance of business and provide cases where such credit cannot be availed. One such case where the credit cannot be availed is on goods that are disposed of as “gift” or “free samples”.
Here the conundrum lies, the difficulty faced by companies in availing credit on goods supplies donated during the dire need of pandemic times. The question here arises that whether such donations should be ascertained as “voluntary” or “gift” when distributed under CSR obligations. Whether the companies can argue that this benefaction should not be barred from availing ITC, considering its nature is “mandatory” as opposed to “voluntary”. The Haryana and Gujarat State Governments introduced certain policies to avoid this ambiguity from becoming a challenge for the companies disposing of their CSR duties. As per the notifications issued, the applicable State GST (SGST) and Integrated GST (IGST) will be reimbursed to the companies engaged in distributing essentials. However, despite such incentivisation by the State Government, the interplay between goods and services provided to fight the outbreak and their eligibility for ITC remains an ambiguous aspect on broader terms and needs an urgent if not a permanent address.
*4th year student, BA LLB (Hons.), National Academy of Legal Studies and Research, University of Law, Hyderabad.
**3rd year student, BA LLB (Hons.), Maharashtra National Law University (MNLU), Nagpur.
3Nilesh Vasa and Anindita Sarkar, A taxing “Corporate Social Responsibility for Companies under GST?” dated 14-5-2018 published in LSI LawStreetIndia.
4 Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.
5Companies (Amendment) Act, 2019.
6 Central Goods and Services Tax Act, 2017.
7Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 to the second proviso to S. 135.
8 Companies Act, 2013, Schedule 7.
9CGST Act, 2017, S. 16, as amended by Act 31 of 2018 and brought into force w.e.f. February 2019.
10CGST Act, 2017, S. 17(5), as amended by Act 31 of 2018 and brought into force w.e.f. February 2019.
11 Income Tax Act, 1961, S. 37.
12 Income Tax Act, 1961, S. 17(2).
13Polycab Wires (P.) Ltd., In re,2019 SCC OnLine Ker AAR-GST 1
142018 SCC OnLine CESTAT 7175.
15Circular No. 127/9/2010-ST, dated 16-8-2010.
16Essel Propack Ltd. v. Commr. of CGST, 2018 SCC OnLine CESTAT 7175.
18Indian Institute of Corporate Affairs, In re, (Advance Ruling No. 08/DAAR/2018 dated 28-06-2019), AAR-Delhi (2019) 107 Taxmann.com 413.
20Notification of Customs, No. 32/2021-Customs, New Delhi dated 31-5-2021.
21Ad hoc Exemption from IGST, Order No. 4/2021-Customs dated 3-5-2021.
22GST: Representation to Address Concern of Input Tax Credit on Procurement of Covid-19 Related Goods, NASSCOM Community, The Official Community of Indian IT Industry.