[Opinion] Input Tax Credit on Corporate Social Responsibility expenses

Payal Khakhar – [2022] 145 taxmann.com 390 (Article)

(A) Background of CSR expenses

• In terms of section 135 of the Companies Act, 2013, every company with a specified networth or with a specified turnover, or with a specified net profit is obliged to incur a minimum of 2 % of their average net profit of immediately preceding 3 financial years towards their corporate social responsibility and failure to do so attracts penalty under the provisions of the Companies Act, 2013.
• CSR expenses could be incurred by the companies for infrastructure development, healthcare, education, social causes which aid’s the betterment of society, etc. Companies undertaking CSR projects would be requiring various inward supplies of goods or services in order to complete the same. These inward supplies could have GST levied on it. Therefore, an important question that arises in this context is “whether GST paid on such CSR expenses are eligible for the Input tax credit under GST?”

(B) Analysis of provisions of The Income Tax Act, 1961 (referred as ‘Income Tax Act’) and The Goods and Services Act, 2017 (referred as ‘GST Act’)

1. Income Tax Act

• It is pertinent to note that deduction for CSR expenditure is not allowed under Income Tax Act, 1961.
• As per explanation 2 to sec 37 of the Income Tax Act 1961,

“any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of business or profession”.

• Central Board of Direct Taxes (‘CBDT’) has clarified that –

“CSR expenditure, being an application of income is not incurred wholly and exclusively for the purpose of carrying on a business. If such expenses are allowed as a tax deduction, this would result in subsidizing of around one-third of such expenses by Government by way of tax expenditure.”

• On a perusal of the above, by way of deeming fiction, deduction of CSR expenses is not allowed under Income Tax Act deeming it not to be for business or profession.

Click Here To Read The Full Article