[Opinion] Perspicuity on ITC regarding CSR Expenses in GST

Corporate Social Responsibility (CSR) is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the local community at large. As per the data published by Ministry of Corporate Affairs, Indian companies have collectively spent INR 25,714 crore in FY 2020-21 on CSR, out of which approx. 54% was spend towards two sectors of paramount importance for India i.e. healthcare and education.

Section 135 of the Companies Act, 2013, requires every company crossing the specified threshold limit has to spend at least 2% of its average net profits made during the three immediately preceding financial years, towards fulfillment of its CSR. Such application of income, or CSR expenses can be in the form of cash or kind. From Indirect tax perspective, one of the conundrums behind the CSR expenditure incurred by such companies, was roving around the eligibility of the input tax credit (‘ITC’) in relation to goods or services used for meeting CSR obligation. Such dubiety on CSR spends was present in pre-GST regime and it continued in GST regime as well.

To settle this long-standing issue, Hon’ble Union Finance Minister Nirmala Sitharaman in the Union Budget FY 2023-2024 announced on 1st February 2023, proposed an amendment in GST regulations whereby ITC on the goods and services used in relation to mandatory CSR activities is made ineligible. In the backdrop of this proposed amendment and contrary advance rulings on the said matter, we have deliberated in this article on the eligibility of ITC on CSR related expenses and some issues which are still left unanswered.

Proposal in Finance Bill, 2023

The Finance Bill 2023 has introduced a specific provision that precludes a person to avail ITC on expenses incurred towards fulfillment of its CSR. Section 130(b) of the Financial Bill, 2023 has proposed clause (fa) to section 17(5) of the CGST Act, 2017 (blocked credits) which reads as under –

“(fa) goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013”

Accordingly, the ITC shall not be available in respect of goods or services, or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under CSR referred to in section 135 of the Companies Act, 2013. The amendment is yet to be notified and is proposed to be made applicable prospectively.

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