The Tax Publishers

GST--CSR Expenditure

Now Tax Paid on CSR Expenditure Would be Regarded As Blocked ITC

D. Ramachandra Rao

Hitherto, there was confusion regarding allowability of ITC in respect of tax paid on CSR Expenditures. The AAR Telangana in the case of Bombino Pasta has pronounced an advance ruling in favour of the assessee. Now the Finance Bill, 2023 has proposed to amend section 17 of the CGST Act so as to treat the tax paid in relation to CSR Expenditure as blocked credit. The learned author seeks to analyse implications of the amendment.

1. Statutory provisions i.r.o. allowability of input tax credit

Section 16 of the Central Goods and Services Tax Act, 2017 (in short "the CGST Act") deals with eligibility and conditions for taking input tax credit. As per Sub-section (1) of section 16 of the CGST Act, 2017, 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. It is clear from the above provision that one of the basic conditions for claiming input tax credit is that the inward supply of goods or services or both are used or intended to be used in the course or furtherance of his business.

Section 17 of the CGST Act deals with apportionment of credit and blocked credit. Sub-section (5) of section 17 contains the list of goods or services that are not eligible for input tax credit.

As per section 17(5)(h) of the CGST Act, 2017, 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."

The above provision thus restricts credit of the goods that were written off or disposed by way of gift or free samples.

Hitherto, the GST authorities have been denying benefit of input tax credit of tax paid on goods and services used in performing CSR activities. However, the taxpayers have been contesting the same on the ground that the since the CSR expenditures are carried in pursuance of the statutory provisions, tax paid on the goods or services used for carrying such activities are eligible for input tax credit.

3. Statutory obligation for carrying CSR activities

Section 135 of the Companies Act, 2013 enshrines provisions relating to corporate social responsibility.

As per sub-section (1) of section 135 of the Companies Act, 2013, every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more in 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.

Sub-section (5) of section 135 provides that the Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial year , or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

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