Donations given to combat COVID-19: GST perspective

[niranjan gupta]

The outbreak of COVID-19 has heavily disrupted the trade, business and is taking a toll on the Indian economy. In addition to the slew of relief measures announced by government of India to combat the pandemic, business organizations and NGO’s have step forward in extending full support to the government of India in overcoming this pandemic. In order to cater to such distressing situations and to strengthen the disaster management capacities, the government of India has instituted a ‘PM-CARES Fund’ for collecting donations. Now, donations are being given by various business organizations, NGO’s & citizens of India in the following manner-

1. Direct cash donation in the PM-CARES Fund
2. Donations given in the form of supplying essentials such food kits, masks, sanitizers, personal protective equipment’s, ventilators etc. directly by business organizations, NGO’s etc.
3. Raising of cash donations by business organizations & NGO’s from the general public and procuring essential supplies such food kits, masks, sanitizers etc. out of such cash donations and thereafter supplying the same to the needy.

In this backdrop, it will be quite interesting to discuss the applicability of GST on such donations so that necessary representations may be made before the government of India for granting tax relief to this sector.

Monetary Contributions in PM-CARES Fund

In order to classify any transaction under the ambit of GST, such transaction shall necessarily be classified under the domain of taxable event envisaged in section 9 of CGST Act, 2017. Section 9 of CGST Act, 2017 at the onset clearly provides that, “there shall be levied a tax called central goods and services tax on all intra-state supplies of goods or services or both….” Such transaction shall necessarily fall within scope of the expression ‘goods’ or ‘services’ in order to trigger the taxable event. Hence, monetary donations does not fall within the scope of goods as defined in section 2(52) of CGST Act, 2017 and as well as services defined in section 2(102) of CGST Act, 2017. This is as good as transaction in money falling under the exclusion part of section 2(102) of CGST Act, 2017.

Donations in kind by business organizations

1. Where donations are being given by business organizations by expending its owned resources

Such donations in kind are being given in the following manner-

1. Supply of company’s own products free of cost or at concessional rate
2. Procuring a different product and then supplying the same free of cost or at a concessional rate

 In order to classify any transaction within the scope of supply envisaged in section 7 of CGST Act, 2017, following essential ingredients should be present in the transaction-

1. Consideration
2. Transaction should be in the course or furtherance of business

Now, where products are supplied free of cost, it can be argued that there is no element of consideration and thus the same shall not fall within the scope of supply not exigible to GST.

However, it is important to analyze another side of the coin i.e. Schedule I which provides the activities to be treated as supply even if made without consideration. One of such activity being ‘permanent transfer or disposal of business assets where input tax credit has been availed on such assets’. It is pertinent to mention here that where goods procured for the purpose of donation formed part of the business assets of the company and input tax credit has been availed on such assets, then the same may be subject to levy of GST even if no consideration is being received.

Where products are supplied at a concessional rate then such transaction may attract the levy of GST provided such transaction satisfy the other essential condition of supply i.e. ‘in the course or furtherance of business’. It is important to determine whether such transaction fall within scope of business defined in section 2(17) of CGST Act, 2017 as follows-

 “(17) “business” includes––

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a)…”

From the bare perusal of the aforesaid definition, it is clear that any transaction in the nature of trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity whether or not made for economic benefit shall be treated as business. Thus, it can be said that supply of products free of cost or at a concessional rate very well fall within the ambit of the expression ‘business’ defined above. Hence, GST shall be payable where such goods are supplied at some concessional rate or some nominal value and in case of free of cost if such goods formed part of the business assets of the company on which input tax credit has been availed.

Now, the next question that merits consideration is the admissibility of the input tax credit on goods procured for the purpose of donation. The discussion regarding the admissibility is divided into two parts as follows:

(a) Where outward supply of such goods is made free of cost and no tax is being charged on such supply : Where goods are supplied free of cost and the same is not considered as supply in view of Schedule I to CGST Act, 2017 then the input tax credit pertaining to the same might not be admissible on account of restriction capped by section 17(5) (h) of CGST Act, 2017. The similar view is taken by Authority of Advance Rulings, Kerala in the case of IN RE: M/S. POLYCAB WIRES PRIVATE LIMITED [2019 (4) TMI 111 - AUTHORITY FOR ADVANCE RULINGS, KERALA]

(b) Where tax is being paid on such outward supplies whether supplied free of cost or with consideration: Where tax is being discharged on goods supplied free of cost or with consideration in accordance with the valuation provisions then input tax credit pertaining the same shall be admissible subject to blocked credits in section 17(5). 

 

2. Where donations are being given by business organizations by raising money from general public

In such a scenario, consideration is being received from general public for supplying goods or services to the needy. As per section 2(31), consideration can be received either from the recipient or any other person. Further, if such donation is specifically received for supplying the goods to the needy & the same can be established then it can be said that nexus between the supply of goods & receipt of consideration exists. Thus, it is clear that as and when goods are supplied either free of cost or at concessional rate, the same shall be taxable. Now, the question that merits consideration is the value on which tax shall be paid in case supply of goods is made at a concessional rate. Where goods are supplied at a concessional rate then it can be said that consideration is flowing from recipient of goods as well as the individual donor i.e. the other person. Ideally, if the amount of donation received is specifically earmarked for supplying goods and some concessional amount is also recovered from the recipient then tax shall be paid on the entire value i.e. donation amount and the concessional amount recovered from the recipient. However, ambiguities are prevailing with respect to the expression mentioned in the definition of consideration defined in section 2(31) of CGST Act, 2017. Section 2(31) clearly provides that the consideration can either flow from recipient or any other person. The expression ‘or’ used in the definition of consideration raises ambiguities regarding the receipt of consideration from one person only i.e. either recipient or any other person.   

Donations received/made by charitable organizations/Religious trust

There are two limbs of this transaction i.e. first, where donations in cash is received by charitable organizations and second, where such donations are appropriated for performing charitable and non-charitable activities.

1) General Donations received by charitable organizations/Religious trust

In the first case, where general donations in cash are received by charitable organization then such transactions may not be subject to GST if there is no nexus between the amount of donation received and supply of services by charitable organization. Now, when these donations are being appropriated against any charitable or non-charitable cause, then the same shall not be taxable since nexus cannot be established between the consideration received and supply made.

2) General Donations received by charitable organizations/Religious trust with a direction

However, there may be case where a donor gives specific direction but which can be considered as an act of philanthropy and is not aimed at giving publicity or not a direction to supply any specific goods or services, the same shall not be taxable in view of Circular No. 116/35/2019-GST. The relevant extract of the circular is reproduced below-

“Individual donors provide financial help or any other support in the form of donation or gift to institutions such as religious institutions, charitable organizations, schools, hospitals, orphanages, old age homes etc. The recipient institutions place a name plate or similar such acknowledgement in their premises to express the gratitude. When the name of the donor is displayed in recipient institution premises, in such a manner, which can be said to be an expression of gratitude and public recognition of donor’s act of philanthropy and is not aimed at giving publicity to the donor in such manner that it would be an advertising or promotion of his business, then it can be said that there is no supply of service for a consideration (in the form of donation). There is no obligation (quid pro quo) on part of recipient of the donation or gift to do anything (supply a service). Therefore, there is no GST liability on such consideration.”

3. Specific Donations raised by charitable organization for supplying specific goods or services

Where donations are being received by charitable organization with the specific direction to supply goods or services then the same may be considered as supply on the following grounds:

1.  Presence of Consideration: As per section 2(31) of CGST Act, 2017, consideration in relation to the supply of goods or services or both includes––

1. any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other personbut shall not include any subsidy given by the Central Government or a State Government;

Thus, in the present case consideration is flowing from the donors and not from the recipient of goods or services supplied by charitable organization.

2. Supply made in the course or furtherance of business:The expression ‘business’ is defined in section 2(17) of CGST Act, 2017 which provides that business includes-

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a)…”

Thus, a transaction shall still be considered in the nature of business even if it is not made for economic benefit. This implies that any goods or services supplied by charitable organization for some social cause may still be subjected to GST if does not specifically falls under exemption granted vide N/N 12/2017-Central Tax (Rate).

3. Nexus between consideration received and supply made:The attention is invited to the expression ‘in respect of or in response to’ in the definition of consideration. This implies that there should be nexus between the consideration received and supply made. Now, where donations are received with a specific direction to supply specific goods or services, it can be said that there is a direct link between the consideration received and supply made.

Further, attention is invited to the proviso to section 2(31) of CGST Act, 2017 which provides that

“Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply”

So, one may argue that amount of donation received is as good as deposit and hence excluded from the purview of the definition of ‘consideration’. However, even if the donations received with specific directions are considered as deposit, the same stands applied to the supply of goods or services for the purpose of which the same were received.

Hence, in the light of above contentions it can be concluded that donations received with specific direction falls within the purview of supply and exigible to GST. In order to strengthen the view, attention is invited to the ruling pronounced by Authority for Advance Rulings, New Delhi in the case of IN RE: M/S INDIAN INSTITUTE OF CORPORATE AFFAIRS reported as 2019 (8) TMI 29 - AUTHORITY FOR ADVANCE RULINGS, NEW DELHI wherein it was held that, “In the present case, there is a direct link between the amount paid and the supply of taxable service of installation of solar pumps, solar street lights and construction of toilets. The MoU clearly provides that the amount of ₹ 20,35,76,800 is to be paid by AICL to the applicant for installation of specific numbers solar pumps and solar street lights and for construction of Specific numbers of toilets. Further, the MoU specifies the details of the beneficiaries and guidelines to ensure that such services are delivered to them. Hence, it is not a case where IACL has donated lump sum to the applicant for carrying out activities which the applicant may be persuing. The amount paid in this case is linked to specific taxable activity.”

Further, reliance is also placed on the ruling pronounced by Appellate Authority for Advance Ruling Maharashtra in the case of IN RE: SHRIMAD RAJCHANDRA ADHYATMIK SATSANG SADHANA KENDRA  reported as 2019 (1) TMI 25 - APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA wherein it was held that, “Specific exemption from GST is given to charitable institutions registered u/s.12AA of the IT Act, 1961. It can be gathered that the intention of the legislature is to tax all the activities of supply goods and services by charitable trust except those specifically exempted. This is with the background that charitable institutions qua their activities of charity do not lend themselves to any specific concession or exemption from the definition of ‘supply’ or ‘business’ or ‘taxable person’. The very fact that certain services have been carved out and given out a special treatment makes it clear that all trade and commerce transaction of selling books, statutes, CDs and DVDs etc. done commercially for consideration come within the broad ambit of ‘business’ under the CGST Act.”

Now, where such goods or services are supplied by charitable organizations registered under section 12AA of the Income Tax Act, 1961, then the same may be treated as exempt provided such supply of services fall within domain of charitable activities specified in N/N 12/2017-Central tax (Rate).

There are lot of charitable organizations who are directly engaged in performing charitable activities for the welfare of the society. The government of India has bestowed a number of tax benefits to such organizations provided such organizations are registered under section 12AA of the Income Tax Act, 1961. The services performed by an entity registered under section 12AA of the Income Tax Act, 1961 by way of charitable activities are exempt from the whole of GST vide entry No. 1 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. The expression ‘charitable activities’ is not wide enough to cover the entire welfare activities performed by such organizations. This restriction is probably being imposed in order to curb the menace of camouflaging taxable activities under the name of charitable activities. In this context, the expression ‘charitable activities’ is defined in N/N 12/2017-Central Tax (Rate) as follows-

(r)   “charitable activities” means activities relating to -

(i)   public health by way of ,-

     (A)   care or counselling of 

      (I)   terminally ill persons or persons with severe physical or mental disability; 

      (II)   persons afflicted with HIV or AIDS; 

     (III)   persons addicted to a dependence-forming substance such as narcotics drugs or alcohol;

                                                                           or

      (B)   public awareness of preventive health, family planning or prevention of HIV infection;

 (ii)   advancement of religion, spirituality or yoga;

 (iii)   advancement of educational programmes or skill development relating to,-

        (A)   abandoned, orphaned or homeless children;

        (B)   physically or mentally abused and traumatized persons;

        (C)   prisoners; or

        (D)   persons over the age of 65 years residing in a rural area;

(iv)   preservation of environment including watershed, forests and wildlife;

It is noteworthy to say that activities of supplying food kits, masks, sanitizers, ventilators etc. for combating COVID-19 is not prescribed within the meaning of charitable activities defined in N/N 12/2017-Central tax (Rate) and hence the same shall be taxable.

Suggestion:Keeping in view the adversities prevailing in the country and commendable efforts of the business organizations/NGO in extending support to the government in combating this pandemic, necessary exemptions should be granted for donations given by way of supplying food kits, sanitizers, masks, personal protective equipment (PPE), ventilators etc. by business organizations and NGOs who is leaving no stone unturned in feeding the poor and helping the health care workers.

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N K Gupta Sr Executive Director and CA Dimpal Bhasin of S S Kothari Mehta &Co