INPUT TAX CREDIT ON EXPENDITURE UNDER CORPORATE SOCIAL RESPONSIBILITY SCHEME

[Mr. M. GOVINDARAJAN]

Introduction

In all over the world the theme ‘corporate social responsibility’ (‘CSR’ for short) is prevailing among the corporate sector.  It is a voluntary one.  Even in the earlier periods in India it was made as voluntary only.  After the enactment of Companies Act, 2013 this scheme has been made as mandatorily.   India is the first country to make the CSR as mandatory.

Definition

Rule 2(1) (c) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 defines the expression ‘corporate social responsibility’ as including but is not limited to-

• Projects or programs relating to activities specified in Schedule VII to the Act; or
• Projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.

Companies to pursue CSR

Section 135 of the Companies Act, 2013 (‘Act’ for short) provides the procedure for implementation of this scheme by the companies whose-

• net worth is ₹ 500 crore or more; or
• turnover is ₹ 1000 crore or more; or
• net profit is ₹ 5 crore or more

during any financial year.

Quantum of amount spent to CSR

The Board of every such company shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.  The company can spend more than 2% of the average net profits of the company.

The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.

CSR activities

Schedule VII to the Act provides the list of activities that may be included by companies in their corporate social responsibility policies.  The said list is as follows-

• eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation] and making available safe drinking water;
• promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;
• promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
• ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resources and maintaining quality of soil, air and water ⁴[including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga;
• protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;
• measures for the benefit of armed forces veterans, war widows and their dependents;
• training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports; 
• contribution to the Prime Minister's National Relief Fund or any other-fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women
• contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;
• rural development projects;
• slum area development.

Income tax provisions

The amount spent by companies towards CSR cannot be treated as business expenditure.  The Finance Act, 2014 provides that any expenditure incurred by an assessee on the activities relating to corporate social responsibility shall not be deemed to be expenditure for the purposes of business or profession.  No specific tax exemptions have been extended to CSR per se.

Even Rule 6(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 states that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company.  The same shall be adjusted against the CSR expenses incurred by the business and the net amount should be calculated which will in turn be treated non-cost and form part of the reconciliation statement.

Issue

The issue to be discussed in this article is whether input tax credit under GST can be availed and utilized on the taxes paid for the purposes of corporate social responsibility with reference to decided case law.  This is the grey area still prevailing in the business sector which has not yet been resolved.

Input tax credit

The expression ‘input tax’ is defined under section 2(62) of Central Goods and Services Tax Act, 2017(‘CGST Act’ for short), in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes–

• the integrated goods and services tax charged on import of goods;
• the tax payable under the provisions of sub-sections (3) and (4) of section 9; (reverse charge)
• the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act; (reverse charge)
• the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; (reverse charge) or
• the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, (reverse charge)

but does not include the tax paid under the composition levy.

The expression ‘input tax credit’ is defined under section 2(63) of the CGST Act as the credit of input tax.

Availing of input tax credit

The input tax credit includes the tax paid on input as well as input services.  The term ‘input’ is defined under section 2(59) of the CGST Act as any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.  The expression ‘input service’ is defined under section 2(60) of the CGST Act as any service used or intended to be used by a supplier in the course or furtherance of business.

As such input tax credit can be availed for those supplies that are utilized for furtherance of business.  The expression ‘furtherance of business’ may be interpreted in many a way.  Definitely many a case will emerge when GST is on regular way between the Department and the assessee.  Since the Income Tax Act is not allowing the expenditure of CSR as a business expenditure, one interpretation may be that the expenditure incurred on CSR activities may not be in furtherance of business and only an obligation to be complied with mandatorily under the Act. 

Case law

On 30.08.2018 the Mumbai CESTAT held that the input service credit in respect of expenditure on CSR can be availed by the company which discharges CSR obligations.

In ‘ESSEL PROPACK LTD. V. COMMISSIONER OF CGST, BHIWANDI’ – 2018 (9) TMI 247 – CESTAT, Mumbai, Audit was conducted in the factory and it was detected that between the period October 2009 and November 2010 CENVAT credit of service tax amounting to ₹ 12,12,772/- was availed towards such company’s commitment to CSR and audit pointed out the same to be inadmissible.  The view of the Department is that such input service did not fall under the definition of input services given in Rule 2(l) of CENVAT Credit Rules 2004 for manufacture of appellant’s final product. The Adjudicating Authority held that the same was inadmissible and imposed interest and penalty.  The Commissioner (Appeals) upheld that order of the Adjudicating Authority.

Against the order of Commissioner (Appeals), the appellant filed appeal before the Tribunal.  He contended that-

• the said expenditure was incurred by the company which was covered under the activities relating to business as provided under the definition of input services given in Rule 2(l) of the Cenvat Credit Rules 2004 
• the services of students were utilized in relation to manufacturing business of the appellant since they were assigned duties to prepare data sheet, maintain production log book, support preventive maintenance of machines, and assist production operators and in the process, they learn the nature of job that made them eligible to become future workers in factories.

The Department contended that-

• there was no nexus of input services with the business activity of the appellant since CSR activities are welfare activities and not related to business/ production related activities;
• the service of imparting training have been provided by the trust M/s. Shree Kalamadevi Charitable 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;
• Section 135 of the Companies Act effective from 01.04.2014 on mandatory CSR activities to be discharged by the company pertains to the period not covered under the period of dispute which was between October 2009 and November 2010 and therefore the contention of the appellant that such obligation of CSR activity was discharged in compliance to statutory obligation is not to be accepted. 

The Tribunal held that if CSR can be considered as input service and be included within the definition of “activities relating to business” and if in so doing, a company’s image before corporate world is enhanced so as to increase its credit rating as found from the handbook of CSR activities discussed above. The answer is in the affirmative since to win the confidence of the stake holders and shareholders including the people affected by the supply of raw material from their locality say natural resources like mines and minerals etc. the hazardous emission that may result in production activities.  The Tribunal allowed the appeal.

Analysis

The decision of CESTAT, Mumbai has been welcomed by many.  This may widen the definition of ‘input service’.  The Department may or may not file appeal against this order.

           This case law may be relied on in the present situation if input tax credit on the expenditure of CSR is denied.  It may be insisted that the logic observed by the Tribunal may also be applicable to the present case.  It may be argued that the compliance of the provisions relating to CSR is in furtherance of business.

In the view of the author the decision of the Tribunal will not hold good for the present position since the disputed period is before 2011 during which the CSR was not made mandatory but voluntary.  The Income Tax Appellate Tribunals in some cases held that the expenditure incurred towards the CSR during the period before 01.04.2014 was business expenditure.

Since there is restriction on allowing the CSR expenses as business expenses, the input tax credit cannot be availed unless otherwise there is a clear provision in the Act or in the Rules.    CSR activities may be linked to section 2(17)(b) of the CGST Act which provides that the term ‘business’ includes any activity or transaction in connection with or incidental or ancillary to any trade, commerce, manufacture, profession, vacation, adventure, wager or any other similar activity, whether or not it is for a pecuniary profit.

The views of the experts in this regard are welcomed by the Author.

Discussions to this article

[CA.Tarun Agarwalla]

sir

please through some light on the legal ratio is drawn where it is expressed that "Since there is a restriction on allowing the CSR expenses as business expenses, the input tax credit cannot be availed unless otherwise there is a clear provision in the Act or in the Rules. "

whereas there are expenses which are legitimate expenses under the income tax, however, the ITC of it have been denied under section 17(5).

the legal ratio came is " can ITC be denied merely on the basis of expenses, not allowed under income tax act,"

please help

[JSW CEMENTLIMITED]

We should rely on the definition of business as provided in GST Act and apply emphasis on meaning of the word "furtherance of business: in general parlance as understood, instead of provisions of Income Tax Act which is separate statute.

[DR.MARIAPPAN GOVINDARAJAN]

If credit is allowed it is OK. Since there is confusion in this regard the GST Council should come with a clarification in this regard.